Stocks, dollar firm ahead of Fed decision

The Federal Reserve raised interest rates on Wednesday for the second time in three months, citing continued USA economic growth and job market strength, and announced it would begin cutting its holdings of bonds and other securities this year.

Treasury yields, which move opposite prices, had fallen sharply Wednesday after core consumer price index inflation came in weaker than forecast for a third month. Currently, inflation is running closer to 1.6%. The Fed paused after that, as tumult like Britain's vote to exit the European Union, jolted the financial world. It forecast that prices will rise just 1.6% this year, down from a March forecast of 1.9%.

The committee said that labor-market data had improved and the unemployment rate has declined since the group met in May.

The overarching message the Fed sent Wednesday was an upbeat one: It believes the USA economy is on firm footing as it enters its ninth year of recovery from the Great Recession, with little risk of a recession. In 2007, as the economy worsened, the benchmark federal funds rate was 5.25 percent.

Federal Reserve Chair Janet Yellen declined to say whether she would serve a second term at the helm of the USA central bank if asked to stay on by President Donald Trump.

The central bank also announced it plans to start selling its holdings of Treasury and agency bonds this year, the first time since it started buying up debt to stabilize the economy following the financial crisis in 2008. 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". That will gradually accelerate by $10 billion every three months, until it's selling $50 billion a month altogether - assuming the economy does what the Fed thinks it will do. Yields fall as bond prices rise.

Exactly when the next rate increase will be is a matter of conjecture. The Fed has previously forecast that it will raise rates three times in 2017.

While Yellen did not specify the potential points of disagreement, she did take issue with the Treasury Department's evaluation of the Dodd-Frank Act's effect on credit conditions nationwide. "They don't want to be in any hurry", said Jason Browne, chief investment officer of FundX Investment Group. Their median expectation for the federal-funds rate showed few changes from projections released in March. "They're going to tiptoe into it until they can normalize things", said Jim Brilliant, portfolio manager of the CM Advisors Fixed Income (CMFIX).

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The Fed is scheduled to announce its latest rate decision at 2 p.m. eastern time (1800 GMT) on Wednesday.

Such projections aren't set in stone and reflect how the views of Fed officials have shifted.

The FOMC is of the opinion that waiting too long to scale back accommodations could potentially cause a rapid increase in rates, which could disrupt the market and send the economy into another recession. Some Fed watchers expect another increase in September.

  • Zachary Reyes