Fed raises rate to 1-1.25%, hints at further hike

15 June 2017

The US Federal Reserve on Wednesday raised its benchmark interest rate to between 1 and 1.5 per cent and hinted at further hike this year as the Federal Open Markets Committee decided to tighten monetary policy despite growing concerns over weak inflation.

Fed policymakers also gave some details for how they intend to shrink their $4.5-trillion balance sheet beginning this year.

The central bank cut its inflation forecast for 2017 to 1.6 per cent from 1.9 per cent as measured by the PCE index. Fed expected US unemployment to end the year at 4.3 per cent instead of its previous 4.5 per cent forecast. It also said the US economy is growing "modestly so far this year."

Fed said the labour market has gained strength since its May meeting and that economic activity has been rising moderately so far this year. Household spending has picked up in recent months, and business fixed investment has continued to expand.

Although inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 per cent in the near term, the Fed expects it to stabilize around the committee's 2 per cent objective over the medium term.

The FOMC continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further.

''In view of realized and expected labor market conditions and inflation, the committee decided to raise the target range for the federal funds rate to 1 to 1-1.25 per cent,'' Fed said, adding, ''The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 per cent inflation.''

Fed said the timing and size of future adjustments will depend on the committee's assessment of realised and expected economic conditions relative to its employment and inflation targets.

However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

While the Fed will continue to reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities and roll over maturing Treasury securities at auction, it plans to gradually reduce its securities holdings by decreasing reinvestments.

The implementation of its proposed balance sheet normalisation programme a gradual reduction in Fed's holding of securities - this year, would also depend on how the economy evolves, it added.

US stocks mostly fell while the dollar cut its losses on Wednesday after the Federal Reserve delivered a widely expected US interest rate hike. A slide in technology stocks weighed on the Nasdaq and S&P 500 as investors worried about the pace of economic growth after the rate increase and weaker-than-expected inflation data.

That helped to lift yields on US two-year notes from their lows of the day. Long-dated Treasury yields though tumbled to their lowest since early November, thanks to the weak inflation and other economic data.

The yield curve, however, flattened with the difference between short-dated two-year Treasury yields and benchmark 10-year yields narrowing to a difference of 78.58 basis points, the smallest since 9 September.

The dollar index was last down 0.06 per cent, while the euro remained unchanged at $1.1214.

Crude oil prices fell sharply, although due to unexpectedly large buildup in US gasoline stocks. US crude fell 3.7 per cent to settle at $44.73 per barrel and Brent settled at $47.00, down 3.5 per cent. Spot gold fell 0.2 per cent to $1,263.03 an ounce.

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