Published: Wed, June 28, 2017
Economy | By Melissa Porter

US Federal Reserve Raises Interest Rates Despite Lower Inflation

US Federal Reserve Raises Interest Rates Despite Lower Inflation

The US Federal Reserve announced it was raising short-term interest rates by a quarter percentage point on Wednesday as the central bank continued to unwind the massive economic stimulus plan brought in after the great recession.

The Federal Reserve made a decision to raise the rate despite revising its projections for inflation down to 1.6 percent for this year, less than its target of two percent.

The statement is much more hawkish compared to the April statement, as it indicates that it is keeping its options open for a third rate hike in 2017 and also adjustments to its balance sheet but subsequent hikes would depend on how economic conditions develop and also on the government's fiscal stance.

Although monthly job gains have moderated, they still have been solid, while household spending and business investment has been expanding, the statement said.

The clear outline has been given by Fed on its decision to cut down its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities.

The Bank also outlined its plan of reducing its balance sheet, which it expanded by buying bonds and other securities in order to tackle the housing crisis leading up to the great United States financial meltdown in 2008.

The US Dollar edged higher as investors pin their collective hopes on another rate increase from the Federal Reserve. For more information about the Fed's balance sheet, please read Inside the Fed's Balance Sheet (The Biggest in the World).

The Fed has now raised rates four times as part of a normalization of monetary policy that began in December 2015.

The Fed's actions and words struck a careful balance between showing resolve to continue tightening in response to falling unemployment while acknowledging the persistence of unexpectedly low inflation this year. Annual inflation is running at 1.7 percent.

The National Financial Supervisory Committee recently forecast the Fed rate hikes, but small increases each time would not insert significant pressure on exchange rates.

The Fed's revised forecasts reduced its estimate for unemployment by year's end to 4.3 percent from a March projection of 4.5 percent. The Fed's target for inflation is 2 percent. The Fed is confident the U.S. economy will pick up again, but will clearly need to watch the data carefully.

Asked about the criticism, Yellen said, "I don't think.The Fed's credibility has been impaired". Neel Kashkari dissented the rate hike. The rate sets what banks can charge each other for overnight loans and influences the availability and flow of money in the USA economy. After a late tumble in technology stocks, the Nasdaq composite lost 0.4 percent, to 6,194.89. USA employers continue to add jobs at a steady rate.

Like this: