US Federal Reserve raises rates, gives details on balance sheet reduction

"It won't stop the Fed from hiking interest rates later today, but it increases the downside risks to our forecast that there will be a further two rate hikes in the second half of this year", said Paul Ashworth, chief USA economist at Capital Economics in Toronto. Concern has also arisen that Congress could delay action on raising the federal debt limit and approving a new budget - possibilities that could upset markets. Sessions' testimony did not provide any damaging new information on Trump, but his refusal to discuss conversations with Trump raised fresh questions about whether the White House has something to hide.

Wall Street stocks were little changed early today as the market awaited a Federal Reserve interest rate decision following lackluster USA economic data. What we are likely to see today, however, is what members of the FOMC prefer to call "normalization", part of a series of small increases created to bring us closer to historically normal interest rates from an abnormally low level. Facebook rose 1.5 percent to $150.68 while Microsoft gained 1.2 percent to $70.65. "In a further sign that the Fed is leading a gradual global exit from monetary stimulus, Canada's Central Bank Governor last night surprised markets with hawkish comments".

The latest Fed rate hike, announced in a statement after a policy meeting, comes as the USA economy is growing only sluggishly.

Fed officials have concluded that the economy, now entering its ninth year of expansion, no longer needs the ultra-low borrowing rates they supplied beginning in the Great Recession.

The yield for the 2-year note, the Treasury note most sensitive to changes in Fed policy, fell 7.7 basis points to 1.290%.

Basic pay rises (excluding bonuses) are expected to have fallen to 2.0% in the three months to April. Only Neel Kashkari, president of the Minneapolis Fed bank, opposed the increase.

Despite the tepid inflation figures, some market participants felt the Fed couldn't be put off their plans for normalizing monetary policy in 2017, though they were still looking for further details on how the Fed intends to reduce its holdings of government paper and mortgage backed securities. Fed officials previously increased the rate in March to a range of 0.75 to 1 percent.

The Shanghai Composite Index lost 0.6 percent to 3,135.32 and Tokyo's Nikkei 225 shed 0.1 percent to 19,917.51. US stock markets were relatively flat through afternoon trading, while the yields on 10-year Treasury notes had fallen to 2.11 percent. 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.

Moves elsewhere were also cautious with MSCI's broadest index of Asia-Pacific shares outside Japan up a fraction and Japan's Nikkei ahead by 0.1 per cent.

Unless last month's gains somehow turn out to be a total blip, it wouldn't be too surprising if the level of employment rises again by close to a triple-digit number of thousands in the three months to April. Higher rates could boost the dollar, making commodities priced in the greenback more expensive for holders of other currencies. It is roughly flat against the pound, at $1.2758. Perhaps more importantly, fed funds futures indicate that market participants only expect one quarter-point rate increase in all of 2018, a starkly different outlook than the FOMC dots imply.

  • Zachary Reyes