Fed raises rate, plans balance sheet reduction

Fed interest rate hike likely, but what comes next?

Fed raises rate, plans balance sheet reduction

The agency's report, published on Monday, said the 2010 law's costs and scope "have resulted in a slow rate of bank asset and loan growth".

The decision, widely expected by financial markets, took the United States 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.

Traders have placed a 91 percent chance of the central bank pulling the trigger on a second rate increase this year. And it's a sign that the central bank believes the US economy is on solid ground.

"It reflects the progress the economy has made", Fed chair Janet Yellen said at a press conference. That's the level the Fed believes is a neutral rate - neither stimulating growth nor restraining it.

With the rate hike, credit card companies will adjust their interest rates accordingly, some immediately, but nearly all within 60 days.

A retreat in inflation over the past two months has caused jitters that the shortfall, if sustained, could alter the pace of future rate hikes. Lael Brainard, a Fed governor, has suggested that balance sheet reduction could start after the Fed funds rate range gets midway towards policymakers' median projection for the long-run value of the Fed funds rate, which is now 3 per cent. The Fed foresees one additional rate hike this year, unchanged from its previous forecast. "A soft Brexit would be good for the United Kingdom economy in the longer term, but in the short term, the uncertainty around the Brexit is going to maintain the pressure on the currency and therefore we do think that the currency may still depreciate". Add to this the inflation data yesterday showing that United Kingdom consumer prices are rising at their fastest rate of increase in 4 years, it paints a picture where people are increasingly finding that their employment income is covering less and less of household bills. The economy has added jobs for 80 consecutive months.

Policymakers also released their latest set of quarterly economic forecasts, which showed temporary concern about inflation and continued confidence about economic growth in the coming years.

"Fed officials predicted three increases at the beginning of the year, but inflation has weakened in recent months", Binyamin Appelbaum wrote in an analysis for the New York Times. They lowered their projection to 1.6% for this year from an estimate of 1.9% in March.

Chris Low of FTN Financial said the Fed "compromised" by continuing the rate increases despite falling inflation, but "the market expects the Fed to take a break".

Overall, the USA has grown at a slow and steady pace since 2009, making it one of the longest periods of growth in American history. Even so, numerous barometers the Fed monitors most closely have given it the confidence to keep gradually lifting still-low borrowing rates toward their historic norms. But with the US economy much improved now, it needs less of the Fed's monetary medicine.

The Fed would start with monthly reductions in Treasury holdings of no more than $6 billion and $4 billion in mortgage bonds. The Committee now expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated. But the Fed maintained its forecast for three rate hikes next year. They meet again four more times this year - in July, September, October and December. Her term ends next February, and it's unclear if President Trump will renominate her for a second term.

Chair Janet Yellen was asked at a news conference whether she anxious that the Fed could rattle markets once it starts shrinking its bond holdings.

"I really don't have anything for you at this point", Yellen said.

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