Published: Thu, June 15, 2017
Economy | By Melissa Porter

Fed raises key rate and unveils plan to reduce bond holdings

Fed raises key rate and unveils plan to reduce bond holdings

"But what is more anticipated are the accompanying materials, like the Fed's latest forecasts on inflation, employment and the "dot plot" forecasts of where the Fed sees policy rates from here", he said. Private economists had expected the move given the labor market's recent performance. It pointed to solid job gains, a lower unemployment rate, higher household spending and expanded business fixed investment. That change, and the reduction in the 2017 inflation forecast, could reduce the urgency policy makers feel to hike rates again in coming months, especially if inflation remains soft.

USA stocks rose slightly after the Fed announcement while the dollar reversed some of its earlier losses though bond yields moved little.

Following the May meeting, the Fed kept the benchmark rate at 0.75-1 percent per annum. When officials raised rates in March, the Fed's preferred inflation measure, released by the Commerce Department, showed prices excluding food and energy had risen 1.8% over the year ended February, matching the strongest reading in almost five years. While unemployment has trended lower in the previous year, sinking from 4.7% to 4.3%, inflation, the change in consumer prices over time, has been remained below its 2% target, which suggests that the economy is not in danger of imminently overheating.

"Our decision to make another gradual reduction in the amount of policy accommodation reflects the progress the economy has made and is expected to make toward maximum employment and price stability assigned to us by law", the chair said during her post-FOMC meeting news conference.

Gold futures also spiked higher Wednesday after the economic data was released.

The US Fed on Wednesday raised bank rates by 25 basis points on expected lines.

The Fed slashed interest rates to 0% in December 2008 to aid the faltering housing market and economy.

In view of realized and expected labour market conditions and inflation, the Committee chose to raise the target range for the federal funds rate to 1 to 1-1/4 percent. Annual inflation is running at 1.7 percent.

But the Fed's forecasts are only predictions and are frequently revised as its assessments evolve.

"The committee now expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated", the rate-setting Federal Open Market Committee said.

Yellen indicated the Fed still remained confident inflation would rise to its target over the medium term, bolstered by what she described as a robust labour market that is continuing to strengthen.

Market participants' focus will be on signals on the frequency of further hikes and how the Fed plans to unwind its huge Treasury bond stockpile over the years ahead. DXY is seen testing an important 61.8% Fibonacci level measured from 2016 lows to 2017 highs and is testing the lower bound of a declining channel that has encompassed price action since the start of the year. Recent data have suggested that inflation may even be slowing further.

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