Published: Thu, June 15, 2017
Markets | By Noel Gibbs

Fed hikes rates third time in six months

The Federal Reserve has raised its key interest rate for the third time in six months, providing its latest vote of confidence in a slow-growing but durable economy.

And in another signal of their confidence in the economy, Fed officials announced that they intended this year to begin reducing the $4.5 trillion in Treasury and mortgage securities and other assets the central bank has purchased since 2008 in an attempt to stimulate the economy.

Fed officials have concluded that the economy, now entering its ninth year of expansion, no longer needs the ultra-low borrowing rates they supplied beginning in the Great Recession.

But the estimate for the central bank's preferred measure of inflation, the PCE price index, was cut three-tenths to 1.6 percent, while the core PCE, which excludes volatile food and energy prices, was cut two-tenths to 1.7 per cent, according to the Summary of Economic Projections.

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However, the statement from the Fed's policy-setting Federal Open Market Committee repeated that it still believes "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". Although it gave no hint on an additional rate hike this year, watchers foresee a similar move in the latter half of the year, reflecting the Fed's previous forecast.

The rate hike was widely predicted and therefore market participants were more interested in the Fed's statements about the balance sheet unwind.

The committee now expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.

"It's very much a full-steam-ahead message, and the dot plot says they expect to hike once more this year".

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Federal Reserve head Janet Yellen justified the decision by highlighting the resilience of the United States economy, which has been buoyed by a robust labour market. In any case, with markets already pricing in the rate hike, REIT investors seemed to shrug off the Fed's move on Wednesday. Inflation did rise a bit earlier this year and managed to hit the Fed's goal of 2 percent a year but has since fallen back.

Crude oil prices were listless after having slumped almost 4 percent to their lowest close in seven months on Wednesday, on an unexpected large build in gasoline inventories. But the Fed still sees on-target (2%) inflation in 2018 and 2019. "The Bureau of Labor Statistics data also shows rising wage pressures, with average hourly earnings for assisted living up by 4.2% on a year-over-year basis in the first quarter".

Meanwhile, participants also provided an update to its economic projections.

A Reuters poll of 21 of the 23 primary dealers that do business directly with the Fed showed 14 of them now believed it would announce the start of its balance sheet normalisation at its September 19-20 policy meeting. By contrast, "doves" favour the direction taken under Yellen, favouring relatively low rates to maximize employment.

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Kashkari, who has been tipped as a potential successor to current chair Janet Yellen, has consistently warned against raising rates, fearing that it might harm the recovery.

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