Fed raises rates by further 0.25%; signals one more hike this year

Share prices are likely to consolidate following recent gains and the Federal Reserve's decision to raise interest rates for the second time in 3 months, an analyst said Thursday.

Following a two-day meeting, the Federal Open Market Committee (FOMC) has voted by a majority of 8 to 1 to increase the Federal Funds Rate to 1%-1.25% from 0.75%-1%.

Federal Reserve policymakers have raised their target for the benchmark federal funds interest rate by a quarter-point, to a range of 1 percent to 1.25 percent.

Fed officials lowered their forecast for unemployment rate for 2017 down to 4.3 percent, compared to 4.5 percent projection made in March, while their forecast for inflation rate in 2017 was revised down to 1.6 percent from their forecast of 1.9 percent in March, according to the economic projections released by the Fed on Wednesday. The Fed previously raised rates in March, and on Wednesday, it signaled plans for one more rate increase this year. The Fed bought the bonds to try to depress long-term loan rates, but its portfolio saw a five-fold increase to $4.5 trillion.

The rate forecast, based on individual projections from each member, envisions three more rate hikes in 2018 and three more in 2019.

Kim Hyo-sun, Arirang News.

"The central bank said it would gradually ramp up the pace of its balance sheet reduction and anticipates the plan would feature halting reinvestments of ever-larger amounts of maturing securities".

The Fed would start with monthly reductions in Treasury holdings of no more than $6 billion and $4 billion in mortgage bonds. The caps will be increased every three months until they reach fully phased-in levels. By then, the Fed's forecast would put its key policy rate at 3 percent.

Certainly, the core of the Fed have a glass half-full approach to inflation, but there is no doubt that if the future inflation reads don't turn around, like they expect, then the market is going to pile into U.S. treasuries and continue offering USD's, notably against emerging market currencies like the MXN and BRL. If inflation doesn't pick up, he said, the Fed will find that raising rates and reducing its balance sheet is "going to be a hard maneuver". Unemployment has already reached a 16-year low of 4.3 percent.

Federal Reserve Chair Janet Yellen says she has not spoken with President Donald Trump about serving a second four-year term in office.

"The start of balance sheet runoff and the fact that they haven't slowed their projected path of rate hikes suggest they can do both balance sheet and rate hikes at the same time".

The Fed said it "currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated".

But after his inauguration, Trump reportedly praised Yellen as a "low interest rate" person like himself.

  • Leroy Wright