Fed Raises Key Interest Rate For 4th Time Since 2015

Federal Reserve Board Chairwoman Janet Yellen holds a news conference after the Fed released its monetary policy decisions in Washington, U.S., June 14, 2017.

Yellen indicated the Fed still remained confident inflation would rise to its target over the medium term, bolstered by what she described as a robust labor market that is continuing to strengthen. So far, Trump has sent conflicting signals about whether he plans to nominate her for a second term.

However, overall reaction in financial markets was rather muted as the Fed's optimistic outlook was met with some scepticism.

United States bond yields climbed as high as 2.6% in December as markets grew optimistic that the Trump administration's proposals for tax reforms and infrastructure spending would provide a boost to the economy and raise inflation.

The Federal Reserve on Wednesday raised interest rates for the third time in six months, the latest sign that the central bank is eager to cool the economy and end the era of easy money that has been in place since the financial crisis. Meanwhile, the S&P 500 Index fell 0.1 percent, while the Nasdaq Composite fell 0.4 percent, led by tech stocks. It was down a point to 2,439.

The Fed's revised forecasts reduced its estimate for unemployment by year's end to 4.3 per cent from a March projection of 4.5 per cent. Unemployment has already reached a 16-year low of 4.3 per cent.

It's the second hike this year, despite the Federal Open Market Committee now believing inflation will fall well short of its 2 per cent target for the next 12 months. Annual inflation is running at 1.7 percent.

But they downgraded their expectation for inflation to 1.6 percent this year. Real GDP growth is now expected at 2.2% in 2017 versus 2.1% in the March projection but there was no change to the 2018 and 2019 figures. The unemployment rate is now at 4.3 percent, at - or even below - the level long considered to be full employment. At the December 2015 meeting it raised the rate to a quarter of a percentage point and then a year later in December 2016 raised it again to a range of 0.5 to 0.75 percent. With a U.S. unemployment rate of only 4.3%, the rate hike is meant to stop the economy from overheating.

"Now that the Fed is apparently not as dovish as we thought and won't be reacting to weak inflation numbers, the Aussie and kiwi are naturally giving up their gains", Franulovich said.

The Fed's decision was approved on an 8-1 vote with Neel Kashkari, head of the Fed's Minneapolis regional bank, dissenting in favour of holding rates unchanged. In addition, the Fed said it expects to begin reducing its balance sheet this year. The program would gradually reduce the Fed's holdings by allowing a fixed amount of assets- $6 billion of Treasuries and $4 billion of mortgage-backed securities- to roll off on a monthly basis.

Unlike Australia, the Federal Reserve publishes the way its rate-setting committee votes. Meanwhile, the Bank of Japan begins its two-day meeting today.

  • Zachary Reyes