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Fed Raises Rates for Third Time in Six Months

15 Juin 2017

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.

The Fed now sees the unemployment rate ending the year at 4.3 percent, where it sits currently, rather than the 4.5 percent previously expected. "A more dovish surprise, however, could generally see equity markets rallying strongly and especially emerging markets and currencies doing so, which are a bit more sensitive, traditionally, to the Dollars direction (and as the global currency is the USD, a dovish Fed is positive for global liquidity)".

The decision lifted the USA central bank's benchmark lending rate by a quarter percentage point to a target range of 1.00 percent to 1.25 percent as it proceeds with its first tightening cycle in more than a decade. Tech stocks have led the S&P 500's almost 9 percent rally this year, but have faltered in recent days. But the Dow industrials turned up 0.2%, helped by rebounding banks.

Has The Market Priced In A Rate Hike? Home Depot (HD), another Dow component, climbed 1.8%, rebounding from its 50-day line. The euro gained to $1.1250 from $1.1205.

Hopes for those policies had fuelled expectations of a surge in prices - and a jump in borrowing costs - but the agenda is now in trouble as the tycoon faces political crises.

"We expect the dominant market narrative over the coming months to be the fade in Euro area PMI momentum", said Deutsche Bank European equity strategist Sebastien Raedler. That was lower than expected and short of the Fed's announced long-term target.

In a sign of confidence, the Fed upgraded its forecast for US economic growth and unemployment this year.

As a result, the Treasury yield curve flattened, with the spread between 2- and 10-year yields narrowing to less than 80 basis points, its tightest since early September.

"It is too late for them to move the dots; inflation gets talked about verbally in the press conference", said Michael Gapen, chief US economist at Barclays Plc and a former Fed researcher.

"Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined", the Fed said in its analysis of current economic conditions.

They forecast U.S. economic growth of 2.2 per cent in 2017, an increase from the previous projection in March.

Janet Yellen, most of her colleagues on the Federal Reserve, and the Fed's professional staff all reject that idea. The program would gradually reduce the Fed's holdings by allowing a fixed amount of assets- $6 billion of Treasuries and $4 billion of mortgage-backed securities- to roll off on a monthly basis.

For mortgage bonds, the Fed would start with $4 billion per month and raise it in quarterly steps of $4 billion until it reaches a $20-billion monthly limit.

Officials didn't reveal the exact timing of when the process will begin this year, as well as specifically how large the portfolio might be when finished.

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.

"I fully intend to serve out my term as chair", Yellen said at a press conference Wednesday in Washington, adding, "I have not had conversations with the president about future plans", Bloomberg reported.

Fed Raises Rates for Third Time in Six Months