Exchange rates stable despite Fed rate hikes

Andrew Cummings
June 20, 2017

Fed Chairwoman Janet Yellen and her colleagues laid out a plan to shrink the central bank's massive $4.5 trillion balance sheet starting this year, as they raised a key US interest rate.

World stock markets and the dollar are firm ahead of an expected interest rate increase by the U.S. Federal Reserve. The Fed has a 2.4trn portfolio of Treasury bonds and mortgage-backed securities, and a lot of them were in the wake of the financial calamities and slump.

Eighteen of all primary dealers surveyed said the Fed would announce the start of its balance sheet normalization at its September 19-20 policy meeting. The plan would involve halting reinvestments of the growing amounts of maturing securities.

".because we also expect the neutral level of the federal funds rate to rise somewhat over time, additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion".

For agency debt (MINT) and mortgage-backed securities (MBB), this cap would be $4 billion per month, rising by $4 billion every quarter until a cap of $20 billion per month is reached.

HONG KONG: The Hong Kong Monetary Authority raised interest rates after the Fed's move, to help keep the territory's currency at a stable rate against the USA dollar.

On Wednesday, the dollar index barely budged as slightly firmer moves against the euro and yen were offset by losses against the commodity bloc of currencies, such as the Australian and Canadian dollars.

The Fed announced its decision to hike rates by 0.25 percent on Wednesday, bringing them to their highest level since 2008 when rates were cut in the wake of the financial crisis.

They lowered projections for 2017 to 1.6% from their March estimate of 1.9%.

The Fed said that while inflation has been low, it is expected to soon hit the 2 percent target.

A retreat in inflation over the past two months has caused jitters that the shortfall, if sustained, could alter the pace of future rate hikes.

Luo said the PBOC has already conducted pre-emptive measures to stabilise exchange rate expectations, including tightening domestic liquidity conditions and altering the yuan fixing mechanism to give itself more leeway in shoring up the currency.

Yellen indicated the Fed still remained confident inflation would rise to its target over the medium term, bolstered by what she described as a robust labor market that is continuing to strengthen.

The market is expecting one more rate hike by the Fed in the current fiscal year. The prospect of higher interest rates will increase the opportunity cost of holding gold and had some negative impact on market confidence.

USA 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.

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