Federal Reserve Raises Rates As Expected, Expressing Confidence In Economy

Andrew Cummings
June 16, 2017

While it remains to be seen whether the latest weak USA inflation prints prove to be just as transitory as the Fed thinks, the euro dropped as much as 0.5 percent to $1.1164 in London.

The Fed has now raised rates 4X as part of a normalization of monetary policy that began in December 2015.

The rate forecast, based on individual projections from each member, envisions three more rate hikes in 2018 and three more in 2019.

The Fed has announced that at some point this year it is likely to begin the process of gradually reducing its massive holdings of US treasuries and mortgage backed securities, now worth $4.5 trillion.

In a speech in January, Fed Chair Janet Yellen argued that a gradual path of rate increases was the best way to avoid a more damaging scenario for the economy.


"The combination of rising debt burdens and rising interest rates is starting to strain some households, and we're seeing delinquencies pick up from recent lows", McBride says.

The Fed also gave a first clear outline on its plan to reduce its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, most of which were purchased in the wake of the 2007-2009 financial crisis and recession. By then, the Fed's forecast would put its key policy rate at 3 percent.

As markets expected, the Federal Reserve raised its interest rates at the end of its meeting on Wednesday, adding that it would start cutting its Treasury bonds and other securities this year amid solid economic growth and strong employment trends.

Another rate hike this year is "becoming less of a sure thing as every month of data comes out", said Michael Dolega, senior economist at TD Economics.

As the Fed may be too optimistic about its ability to shrink its balance sheets, we see a risk of the start of an unwarranted tightening of Dollars liquidity over the coming 3-12M depending on the timing of the start of the reduction.


Investors' inflation expectations gauged by the spread between the 10-year inflation-linked bonds and conventional bonds fell to 1.726 per cent, completely wiping out its rise since the US presidential election.

Regarding inflation, the Fed sees it stabilizing but remaining below 2 percent (y/y) in the next 12 months.

In the oil space, Inpex is down 1 percent and JXTG Holdings is losing more than 2 percent after crude oil prices fell overnight.

Gold rebounded 0.2 percent to $1,262.89 an ounce on Thursday, after sliding 0.5 percent the previous day.

It has become a core aim of the Fed and an article of faith for Germany's Bundesbank and later the European Central Bank, founded in 1998 with the mandate of maintaining price stability defined as inflation under 2 percent.


The betting is that the administration will choose officials who will tilt the Fed toward a more "hawkish" stance. By contrast, "doves" favor the direction taken under Yellen, favoring relatively low rates to maximize employment.

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