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US Federal Reserve raises interest rate

15 Juin 2017

Chair Janet Yellen was asked at a news conference whether she anxious that the Fed could rattle markets once it starts shrinking its bond holdings.

Asian traders were subdued Wednesday despite a record close on Wall Street as they await the outcome of the Federal Reserve's policy meeting, hoping for guidance on its monetary policy plans.

In December and March Fed officials predicted a total of three rate hikes in 2017, however given recent departures of several Fed officials, the projections could shift slightly this quarter.

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.

But the US central bank acknowledged that the preferred inflation measure will remain below the two percent target for some time.

One possibility suggested would have the Fed begin to pare its holdings late this year and then gradually shed incrementally larger amounts into next year, while allowing the financial markets to adjust to the impact. If you've got a $75,000 mortgage or home equity loan - not on a fixed rate - you'll be paying about $15-$20 more in your monthly payment.

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.

Still, the inflation softness has made markets even less likely to expect the Fed to raise rates over the coming year. "The Fed has said that the timing of the runoff of their balance sheet is tied to normalization of the federal funds rate being 'well underway.' That point, the FOMC has said, is expected to be reached later this year if their economic forecasts are borne out".

The rate decision of the Federal Reserve is shown on a television on the floor of the New York Stock Exchange, Wednesday, June 14, 2017.

Fed officials marked down their projections for inflation this year, though they still see annual price gains reaching their 2% target by the end of 2018. The yield on the 10-year bond was at 2.1310% from 2.2120%. The personal consumption expenditures measure, the Fed's preferred measure, inched up 1.7 percent in April, versus the year before.

The data comes as the Bank of England ends its own policy meeting Thursday and will put pressure on the policy board to raise rates within its two percent target.

As a result, the rate of inflation over the past 12 months as measured by the CPI slowed to 1.9% in May from a five-year high of 2.7% just four months ago.

With the rate hike, credit card companies will adjust their interest rates accordingly, some immediately, but nearly all within 60 days.

"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability", the FOMC said in its statement announcing the hike.

The vote was 8-1, with Minneapolis Fed President Neel Kashkari dissenting from a rate increase for the second time this year, preferring no change. In other words, banks tend to anticipate the federal funds rate increasing in advance and set their mortgage rates accordingly. That's the level the Fed believes is a neutral rate - neither stimulating economic growth nor restraining it. Fed officials previously increased the rate in March to a range of 0.75 to 1 percent.