Fed raises rate, plans balance sheet reduction

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Fed raises rate, plans balance sheet reduction

The Federal Reserve raised interest rates on Wednesday for the second time in three months, citing continued USA economic growth and job market strength, and announced it would begin cutting its holdings of bonds and other securities this year. This is why the Federal Open Market Committee's statement of longer-run goals says it "would be concerned if inflation were running persistently above or below this objective".

A number of market pros also said the Fed sounded surprisingly optimistic about the economy even with a slump in core consumer inflation to a 1.7 percent year-over-year pace from 1.9 percent in April. At that time, the FOMC's dot plots implied eight 0.25% rate hikes in 2016 and 2017, while the market expected just two 0.25% hikes.

The Fed also detailed its plans to sell off trillions in securities purchased during the financial crisis to help stabilize the United States economy.

Like the Bank of England in the United Kingdom, 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 Fed did not set out how much it planned to shrink the balance sheet, saying they expect to learn more as the process goes along.

If the Fed moves, that should not mask the underlying concern among some policymakers about inflation's stubborn refusal to accelerate - or for that matter wage growth that at 2.5 per cent in May was no higher than it was a year earlier.

The central bank chose to raise rates again despite an economic slowdown at the start of 2017, which it predicts will prove temporary.

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

"It is unlikely that this data-slump will halt the Fed's long signposted rate hike this evening", said Campbell. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

The Fed has said it would begin unwinding the Treasurys and mortgage securities it holds as they mature, at an initial cap of $10 billion a month for both. The market has priced in a 97% likelihood of a US Federal Reserve rate hike. "Mr. Cohn has emerged as a key intermediary in the administration's relationship with the central bank", the WSJ reported.

The US central bank is scheduled to release its decision at 1800 GMT on Wednesday with a news conference to follow from Chair Janet Yellen.

More important was what the United States central had to say about its plans to rein in its bloated balance sheet, which has ballooned to $4.5 trillion since the financial crisis as the Fed has bought government and mortgage-backed bonds to underpin the American economy.

The Fed's quarterly projections show they still anticipate making a third rate increase this year, with the median federal funds rate ending 2017 at 1.4 percent.

They forecast United States economic growth of 2.2 per cent in 2017, an increase from the previous projection in March. The unemployment rate, at 4.3%, is at its lowest level since 2001.

Markets had been assuming there would be a trade-off between the two elements of policy, in part because New York Fed President William Dudley had spoken about a such a pause.

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