Fed raises key rate and unveils plan to reduce bond holdings

Posted June 15, 2017

If one bears in mind the recent underperformances of the U.S. jobs and wage market, the case for incentivising investment via a lower interest rate (which in turn should raise inflation) seems strong.

Investors were still expecting the Federal Open Markets Committee to increase USA overnight interest rates later on Wednesday at the conclusion of its June policy meeting.

The Fed has $4.2tn of USA treasury bonds and mortgage-backed securities on its balance sheet. Although inflation would stay low in the short term, she still expected inflation to rise over the medium term.

The Fed's preferred measure of underlying inflation has retreated to 1.5 percent, from 1.8 percent earlier this year, and has run below the central bank's 2 percent target for more than five years.

While job gains have moderated, they are still solid on average, and the unemployment rate has declined, the nations banker notes.

"Traders feel that an interest rate hike from the Federal Reserve tonight is inevitable, but the focus will be on the outlook for the remainder of the year", said Madden. Such an increase in the federal-funds rate - the interest rate the Fed controls that sets the tone for other rates - won't have a huge impact on people's budgets.

Investors have been eagerly expecting details for how the Fed would reduce the assets on its balance sheet.

For his part, Cohn said the White House had not decided on whether to keep or replace Federal Reserve Chair Janet Yellen when her term expires in February, while signaling he didn't want the job.

Thus, we may be facing another two years of negative real policy rates in the U.S. and UK.

The Fed will be loath to follow a more hawkish policy in the light of lower consumer inflation as it could rekindle a deflationary trend. "The economy evolves in the manner that we expect", Yellen said. When the Fed announced it wanted to wind down its bond purchasing in 2013, raising the prospect of higher bond yields, stocks sank.

The Fed's estimates for the unemployment rate by the end of this year moved down to 4.3 per cent, the current level, and to 4.2 per cent in 2018, indicating the Fed believes the labor market will continue to tighten.

Meanwhile, the inflation rate is still below the 2 percent level that the Fed deems necessary for a healthy, growing economy and stable prices. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation. Fed officials previously increased the rate in March to a range of 0.75 to 1 percent.

The Fed has a mandate to target an annual inflation rate of 2 per cent.

Shares of H&R Block rose 11.2 percent to $30.01 after the tax preparation service provider's fourth-quarter revenue and profit beat analysts' expectations. President Donald Trump is expected soon to fill three vacancies on the Fed's influential board, and those new members, depending on who they are, could alter its rate-setting policy.

The dollar fell to its lowest since the day after the U.S. election against a basket of major currencies following the release of weaker-than-expected U.S. CPI and retail sales data on Wednesday.