Fed hikes key rate and unveils bond trimming plans

  • Fed hikes key rate and unveils bond trimming plans

Fed hikes key rate and unveils bond trimming plans

"This program. would gradually reduce the Federal Reserve's securities holdings", it said.

The Federal Open Market Committee agreed to raise its benchmark borrowing rate by one-quarter of a percentage point, to a range of between 1.0 and 1.25 percent.

Since officials last met in early May, they have faced conflicting signals about the economy on two items that matter most: employment and inflation. The move follows a record run of jobs growth in the USA that has driven the unemployment rate down to its lowest level in 16 years. Near term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely. On Wednesday it described its plans, though not the exact timing. They meet again four more times this year - in July, September, October and December.

USA government borrowing rates nosed up in the immediate aftermath of the FOMC statement.

For payments of principal that the Federal Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month. Fed officials warned that keeping rates too low, for too long, could limit the bank's ability to respond to a financial crisis. And it's a sign that the central bank believes the US economy is on solid ground. Therefore, the central bank may need to slow down the pace of tightening.

The statement and rate projections contained no major surprises and were close to expectations, but the low level of inflation is clearly a concern and inflation trends will remain a key focus in the short term.

The Dow rose as gains in shares of Travelers Cos and those of Home Depot, recently up 1.5 percent and 1.4 percent respectively, outweighed slides in shares of Apple and those of Intel, recently down 1.8 percent and 1.6 percent respectively. It was only the third hike since Fed chair Janet Yellen had ended the flatline interest rate policy that followed the severe financial crisis which broke out 10 years ago. Inflation was expected to be at 1.7 per cent by the end of this year, down from the 1.9 per cent previously forecast.

The central also updated its projections for inflation to take account of a slowdown.

It remains to be seen whether the latest rate increase will have a stronger influence on markets. Measures of financial conditions have loosened.

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. But the Fed maintained its forecast for three rate hikes next year.

The Fed also put out a statement about its plans to unwind its very big bond portfolio, bought as part of its bid to restart the United States economy after the 2007-09 recession. There it stood for 7 meager years while the economy recovered slowly.

The Fed also cited a strengthening consumer and business spending.

Since then, inflation has ticked lower, due only in part to an idiosyncratic decline in wireless phone plans.

A reading of 1.7% earlier on Wednesday had raised doubts that the Fed had further room to manoeuvre this year.

Fed leaders see the unemployment rate remaining at about 4.3% this year and falling to 4.2% in 2018.

US government bond prices rallied Wednesday after the inflation report from the Labor Department, sending the yield on the benchmark 10-year Treasury note to a fresh 2017 low. Bond prices fall as yield rise.

The American economy has added an average of 190,000 jobs each month over the past two years.

The dollar index fell 0.11 percent, with the euro up 0.04 percent to $1.1219.