Published: Fri, June 16, 2017
Markets | By Noel Gibbs

Gold, silver futures settle higher after Fed raises interest rate

Gold, silver futures settle higher after Fed raises interest rate

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

The dollar was steady on Wednesday, reversing major early losses, after the Federal Reserve raised USA overnight interest rates and said it was prepared to continue tightening monetary policy.

After the Fed announcement the Dow Jones Industrial Average managed to touch an all-time high of 21,391.97 overnight, finishing 0.2 percent higher than the preceding day.

Top officials of the USA central bank raised the benchmark interest rate slightly on Wednesday, as the recovering economy no longer seems to need quite as much of the boost it gets from ultra-low rates.

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 percent, according to the Summary of Economic Projections. The Fed has kept its key interest rate at unprecedented low levels for years in an effort to help the economy recover from the Great Recession.

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The U.S. dollar bounced back from seven-month low against a basket of currencies after the Federal Reserve raised interest rates and gave a first clear outline on its plan to reduce its $4.2-trillion portfolio of bonds.

The Fed said it would allow a small amount of bonds to mature without being replaced - an amount that would rise as markets adjusted to the process. Now it's making plans to reduce those holdings, which total more than $4 trillion.

"For agency debt and mortgage-backed securities, the cap will be $4 billion per month initially, increasing by $4 billion at quarterly intervals over a year until it reached $20 billion per month".

"It remains to be seen if the Fed can really do both this year - raise rates again, and also begin reducing its balance sheet", Imaizumi added.

Fed Chair Janet Yellen's news conference highlighted the central bank's rosy outlook on the economy, boosting the dollar broadly.

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"In this climate, there are no incentives to buy the dollar", she said. In the past, the effect of a Fed rate hike was a sharp fall in Indian equity indices, but this time, mirroring the trend in last one year, the market holding its own is a testimony to India's growing economic strength in the emerging markets and absence of better investment destinations. That's the level the Fed believes is a neutral rate - neither stimulating growth nor restraining it.

"Hence there is another rate hike on the table for this year". Some also note that political paralysis in Washington has raised doubts about whether Congress will increase the nation's borrowing limit and pass a new budget.

Investors have been pleased that the Fed is disclosing details of its plans and doesn't intend to move too quickly. However, the US Fed rate hike could have some short-term impacts on the Indian economy and markets. But Fed officials have said they think inflation will soon pick up along with the economy. The Aussie edged up 0.1 percent to 75.92 US cents after gaining 0.6 percent.

Copper fell 0.6 percent to $5,665 a tonne, having earlier hit a one-week low of $5,642, while Shanghai aluminium dropped 1.2 percent to $13,560 a tonne. It forecast that prices will rise just 1.6 percent this year, down from a March forecast of 1.9 percent.

"The meeting was definitely tilted towards the hawkish side".

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Equities have taken these lower rates in stride.

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