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

Fed raises rates for second time in 3 months

Even with signs that inflation is on the decline, the US central bank chose to raise its benchmark interest rate by a quarter percentage point, from one percent to one-and-a-quarter.

It also announced plans to start paring its bond holdings later this year, which could cause long-term rates to rise.

The benchmark USA 10-year Treasury yield slumped to 2.14% Wednesday as disappointing US inflation and retail sales numbers overshadowed the Fed meeting outcome. Though the economy is growing sluggishly and inflation remains below the 2 percent target, it foresees improvement in both measures.

Citing recent inflation declines, greater household spending, and a steady job market, the Fed voted almost unanimously to increase the interest rate; as in March, when rates rose from 0.75% to 1.0%, Minneapolis Fed president Neel Kashkari was the lone holdout.

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The median estimate of the long-run neutral rate, which is seen as the level of monetary policy that neither boosts nor slows the economy, was unchanged at 3.0 percent.

More important was what the United States central had to say about its plans to rein in its bloated balance sheet, which has ballooned to $4.5 trillion since the financial crisis as the Fed has bought government and mortgage-backed bonds to underpin the American economy.

"We expect inflation to remain low in the near term", Yellen said. The long run average (or the non-accelerating inflation rate of unemployment) was also lowered, from 4.7% to 4.6%, in yet another indication that the current very low unemployment rate is posing little threat to wage inflation. Some economists suggested that even though the Fed foresees one more rate hike this year, the persistently low inflation may lead it to leave rates alone until 2018.

The committee signaled that more rises are on the horizon and that it "expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate". At 4:30 p.m. ET, the yield on the 10-year Treasury note was 2.14%, still a steep 8 basis points down from Tuesday's close.

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Uncertainty also surrounds the membership of the Fed's own policy committee. Such a strategy will see a reduction in the USA central bank's quantitative easing programme. Marvin Goodfriend, an economist at Carnegie Mellon University, has been mentioned for another board spot, and Robert Jones, chief executive of Old National Bancorp in IN, reportedly is a candidate for a board seat designated for a community banker. It later settled around 109.60 yen as traders digested the slightly more hawkish tone of the Fed.

"The economy is doing well, is showing resilience", Yellen said in her quarterly press conference.

She stated that she would serve her full term as Chair and had had no conversation with President Trump on the possibility of a second term.

"That's probably behind Kashkari's dissent in terms in wanting to keep rates where they were, but they didn't seem terribly anxious", she said.

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