Fed Hikes Interest Rate, Will Reduce Balance Sheet

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Fed Hikes Interest Rate, Will Reduce Balance Sheet

The Federal Reserve increased short-term interest rates by a quarter percentage point on Wednesday, and outlined a plan to trim its massive bond holdings amassed to bolster a recession-weakened economy.

Markets could give extra weight to Thursday's economic data, after the Fed said it would proceed with interest rate hikes despite softish inflation data.

Fed Chair Janet Yellen is due to hold a press conference at 2:30 p.m. EDT (1830 GMT). The Federal Reserve is hiking a key interest rate for the second time this year and is planning to reduce the size of its $4.5 trillion balance sheet as well.

That said, no one expects the Fed's rate hikes to turn aggressive.

They increased their projections for economic growth this year to 2.2 percent from the 2.1 percent they forecast in March. If Yellen is wrong and inflation stays low, the Fed is in danger of having companies and consumers conclude that the central bank is not serious about hitting its price goal. Fearing that the Fed would begin hiking and tightening policy as soon as QE concluded caused investors to sell-out of bonds in anticipation of higher yields and lower prices.

The Fed kept forecast for economic growth this year of 2.2 percent, up slightly from its March forecast, with growth of 2.1 percent in 2018 and 1.9 percent in 2019. "The economy evolves in the manner that we expect", Yellen said.

Traders have placed a 91 percent chance of the central bank pulling the trigger on a second rate increase this year.

The Fed amassed the securities in three rounds of so-called quantitative easing, or QE, meant to stimulate US investment and hiring in the wake of the 2007-2009 financial crisis and recession.

The estimate for the central bank's preferred measure of inflation, the PCE price index, was cut three-tenths to 1.6 percent, while the core PCE, which excludes volatile food and energy prices, was cut two-tenths to 1.7 percent, according to the Summary of Economic Projections.

The decision to raise rates does not signal the beginning of "tight" monetary policy from the Fed, but it does mark another step towards normalisation, as well as confidence in the long-term recovery of the economy. Real GDP is estimated to have increased at 1.2% in the first quarter. The Fed's annual target is 2 percent, which policymakers still anticipate will be reached next year.

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.

That inflow pushes up the value of the dollar, which can make USA exports costlier overseas.

S&P 500 e-minis were up 1.25 points, or 0.05 percent, with 134,445 contracts traded. In Asia, Japan's Nikkei 225 ended the day marginally lower.

Nasdaq 100 e-minis were up 9 points, or 0.16 percent, on volume of 9,023 contracts.

"Dealers were quick to dump the U.S. dollar in the wake of inflation and retail sales numbers that missed investors' expectations", said David Madden at CMC Markets UK. The British pound stabilized after its recent tumble and was trading at $1.2732.

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