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Federal Reserve Hikes Key Rate, Unveils Bond Trimming Plans

15 Juin 2017

Credit Agricole Research: We expect the FOMC to raise the fed funds rate by 25bp: the hike is fully priced in and doing otherwise would trigger market volatility that the Fed would be keen to avoid.There should not be any formal announcements with respect to the balance sheet policy but that could come as soon as the September meeting. By then, the Fed's forecast would put its key policy rate at 3 percent.

The Federal Reserve on Wednesday raised the federal funds rate another quarter-point, lifting the target to 1% to 1.25% in the second of three expected hikes in 2017. The 10-year Treasury hit the lowest level since the week of the November election and the 2-year yield saw its sharpest single-day drop since Brexit, but yields rebounded somewhat after the Fed statement. "After all, with the exchange rate stable, manat depositors are making strong gains in USD terms when the exchange rate is flat or lower (USD/AZN rate is lower), given the policy rate of 15 percent relative to the USA rate of 1 percent". But America no longer needs as much of the Fed's medicine. It's the Fed's third rate hike since December. However, if the price remains below resistance, I will continue to focus on downside extension targets at 95.85-94.83.

Greg McBride, an analyst with consumer financial site, tells NPR's Yuki Noguchi that, taken together, the Fed's moves have caused home equity and auto loan rates to increase about 1 percentage point over the last two years.

Gold turned negative after the Fed rate increase.

The Fed will be loath to follow a more hawkish policy in the light of lower consumer inflation as it could rekindle a deflationary trend. The committee still expects to see a 2% inflation rate in both years. Coupled with an unchanged dot plot this could be enough for the U.S. yields and the United States dollars to move higher after the Fed. This is an illustration representing the anonymous forecasts of each Fed official - the board members as well as the 12 regional bank presidents - for the timing of future rate hikes.

Starting in 2008, the Fed expanded its balance sheet five-fold to its current $4.5 trillion through purchases of Treasury and mortgage securities. While Yellen noted that the Fed would avoid the risk of hiking too rapidly, they are likely working toward carefully pulling the Fed Funds Rate (FFR) as far away from the zero-bound as possible so that when there is another recession, the Fed will have "bullets" in their gun.

U.S. retail sales recorded their biggest drop in 16 months, while consumer prices fell unexpectedly in May, raising questions about the Fed's ability to further tighten monetary policy.

Though it assesses the overall economy, the Fed's mandates are to maximize employment and stabilize prices.

The committee said it intends to "gradually reduce the Federal Reserve's securities holdings".

Fed chair Janet Yellen (pictured) said she "continues to expect the ongoing strenght of the economy" would warrant further rate hikes over the next two years. "Donald Trump is meeting stiff opposition in implementing campaign promises on tax reform, financial deregulation and infrastructure spending, which could well curtail growth in the world's largest economy".

Fed officials now expect the US unemployment rate to end the year at 4.3 percent, down from the 4.5 percent they predicted in March. Joblessness in the USA dropped to a 16-year low at 4.3 percent in May. 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.

You need to be Logged in to sign up for Express Login. But the Fed also dropped previous language signalling it was closely watching overseas and markets developments, signalling more optimism about the global outlook. Trump has sent mixed signals about whether he would nominate Yellen for a second term. The administration has yet to nominate any candidates for Senate confirmation.

Federal Reserve Hikes Key Rate, Unveils Bond Trimming Plans