Rate Rises Again in Second of 3 Expected Hikes

At a meeting of its Federal Open Market Committee, the U.S. Federal Reserve, or Central Bank, approved a quarter-point increase in its benchmark target, moving the rate from 0.91% to 1.25%, despite inflation running below the bank's targeted 2%. It was the second time the Fed has raised rates this year after the first hike in March.

The Federal Reserve increased interest rates on Wednesday for the second time in three months, citing continued United States economic growth and job market strength.

The Fed's leaders say they expect the world's largest economy to grow at a 2.2 percent annual rate this year, and expand a bit more slowly in 2018 and 2019.

Household spending has picked up in recent months, and business fixed investment has continued to expand, the Fed said.

It forecast USA economic growth of 2.2% for 2017 - an increase on its last estimate - but said it would be watching inflation carefully as its main measure was now expected to come in lower than expected at 1.6%.

The Fed also stated it will reduce its securities holdings, reducing its four.two trillion dollars portfolio of bonds and securities, most of which were bought during the global financial crisis. Starting later this year, the Federal Reserve will allow $10 billion per month in Treasury securities, agency debt and mortgage-backed securities to not be reinvested. After three rounds of so-called quantitative easing the Fed acquired $4.5tn worth of bonds, including $1.8tn in mortgage securities.

"The Fed said the initial cap for Treasuries would be set at $6 billion per month initially and increase by $6 billion increments every three months over a 12-month period until it reached $30 billion per month in reductions to its holdings". Or, more accurately, a confounding lack of inflation - which, for a 21st-century central bank, is a major obstacle indeed. "It's dovish in that they acknowledge the data has softened and they haven't dismissed the weaker inflation readings as being merely transitory". Interest rates on auto loans have increased a little since the Fed started raising rates in 2015, but rates on mortgage loans remain unchanged.

The Fed, as expected, raised its benchmark rate to a range between 1 percent and 1.25 percent, citing the continued strength of job growth and dismissing, for now, the renewed weakness of inflation.

"It just looks like the Fed is sticking to their story and the market remains highly skeptical that the Fed is going to be able to deliver just based upon underlying data".

The message the Fed sent on Wednesday was upbeat: It believes the USA economy is on firm footing as it enters its ninth year of recovery from the Great Recession.

The loonie is in the middle of its best week since April of a year ago, up 2.5 percent since last Friday. All in all, this rate hike, the third one in the a year ago, is probably signaling good news about the economy. Inflation is shaping up to be lower than the Fed had hoped to see, but GDP growth and employment projections for 2017 were both improved from those made after the March Fed meeting.

The technology sector fell 1.2 percent, with Apple off 1.6 percent.

Fed Chairwoman Janet Yellen said the process could begin "relatively soon".

  • Zachary Reyes