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US Federal Reserve Raises Interest Rates, Unveils Balance Sheet Cuts for 2017

19 Juin 2017

Reaction was muted on financial markets to the Federal Reserve's latest rate increase, which was widely expected by investors.

Art Cashin, the head of New York Stock Exchange floor operations for UBS, said he doubts the Federal Reserve will be able to raise interest rates again this year because of underlying weakness in the US economy.

The Fed raised interest rates for the second time this year, by a quarter percentage point to a target range of 1.00-1.25 percent and forecast one more rise in 2017. The prime rate will rise to 4.25 percent from 4 percent.

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However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. That rate is closely tied to interest rates on mortgages and other kinds of loans.

Financial markets have been anticipating the increase.

From where you sit, do you have faith in the economy?

In view of realised and expected labour market conditions and inflation, Federal Open Markets Committee (FOMC) made a decision to raise the target range for the federal fund's rate to 1 to 1-1/4%. The decision which was taken on Wednesday was in the 8-1 vote.

Yellen told reporters that the Fed wants the balance sheet contraction "to run quietly in the background over a number of years".

"Long-term Fed expectations remain very much supported".

Cashin spoke one day after the Fed approved its second rate hike of 2017 amid indications that inflation is running well below the central bank's target.

Strategists at Deutsche Bank warned that its European "complacency indicator", which measures valuations relative to market volatility, was at an 11-year high, and the bank expects economic momentum to fade in coming months.

United States core inflation, which strips out volatile food and fuel prices, slowed for the fourth straight month, to 1.7% in May, Bloomberg reported on Wednesday. The S&P ASX 200 in Australia tumbled 1.2 percent to 5,761.00. That dynamic spurs economic growth. The committee had indicated this could only happen once the process of raising rates was "well under way".

This rebalancing could give the Fed the excuse not to hike rates as it would provide additional tightening, Hermes chief economist Neil Williams. The BoE might underestimate the recent spike in prices, but if two or three MPC members see a need to follow the Fed by hiking rates the pound will appreciate sharply. The prospect of higher interest rates will increase the opportunity cost of holding gold and had some negative impact on market confidence.

US Federal Reserve Raises Interest Rates, Unveils Balance Sheet Cuts for 2017