Fed raises rates and outlines balance sheet reduction plan

The Federal Reserve has raised its benchmark lending rate for the third time in six months – crediting a stronger jobs market and economic growth.

The decision, widely expected by financial markets, took the US central bank’s main rate to a target range of 1% to 1.25% and represented its fourth upwards move since December 2015 when it declared the financial crisis hangover at an end.

It forecast US economic growth of 2.2% for 2017 – an increase on its last estimate – but said it would be watching inflation carefully as its main measure was now expected to come in lower than expected at 1.6%.

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

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Federal Reserve chair Janet Yellen expects inflation to stabilise at 2% in the medium term

However, in the absence of any shocks, the rate-setting committee’s statement said it expected to implement one further rate hike in 2017 and signalled it would begin to unwind its massive asset purchase, or quantitative easing, programme later in the coming months.

The Fed has $4.2tn of US treasury bonds and mortgage-backed securities on its balance sheet.

Like the Bank of England in the UK, it embarked on a buying spree during the crisis to boost the economy by electronically creating new money to buy the bonds and securities.

The rate-setting committee said it would start to reduce its balance sheet gradually – increasing the pace as time went on, eventually reaching $30bn per month for treasury bonds and $20bn for agency debt and securities.

The statement said: “The committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.”

Fed chair Janet Yellen told reporters at a news conference it would take “a few years” to complete but insisted that overall policy was not on a pre-set course.

US stocks rose slightly after the Fed announcement while the dollar reversed some of its earlier losses though bond yields moved little.

Neil Wilson, senior market analyst at ETX Capital, said: “The Fed stuck to its guns, raising rates by a quarter point and calling for another hike this year, in spite of some pretty dreadful inflation earlier that has the market doubting the central bank’s willingness and ability to tighten again in the near-term.

“The Fed seems to be prepared to move quickly so it has room to manoeuvre when the next recession hits.

“The Fed looks to be positioning for a downturn but if inflation continues to underperform this may well be the last hike of the year.”


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