US Fed raises rates for second time in three months

Sixty-five percent of Americans carry a credit card balance from month to month says WWJ Business Editor Murray Feldman, for every $1000 they don't pay off - they'll pay about $25 more a year in interest.

However recent United States rate hikes have belied fears of capital outflows from India, with foreign funds continuing to pump in huge liquidity into the stock market.

While the unemployment rate continued to fall and rising wage growth coupled with job gains indicate an economy on the rise, sluggish growth in the average hourly earnings (2.5 percent) is cause for concern.

"The Fed looks to be positioning for a downturn but if inflation continues to underperform this may well be the last hike of the year".

But the biggest vote of confidence in the economy came from the detailed plan on how the Fed will go about reducing its massive holdings of Treasury and mortgage-backed securities. On Wednesday it described its plans, though not the exact timing. "This program, which would gradually reduce the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities, is described in the accompanying addendum to the Committee's Policy Normalization Principles and Plans". It would then increase that amount by $10 billion each quarter until it reaches $50 billion per month. There was only one rate increase in both 2015 and 2016. The move follows a record run of jobs growth in the USA that has driven the unemployment rate down to its lowest level in 16 years. In doing so, the FOMC's actions would likely put further some upward pressure on interest rates as would reduce the demand for such securities in the open market. Wednesday's action is just the latest in a gradual series of rate hikes that are moving interest rates back toward the rates usually seen over the past few decades. That rate is closely tied to interest rates on mortgages and other kinds of loans. The Fed said a recent softening in inflation was seen as transitory, but the latest tepid price readings made investors question its view that the United States economy is continuing to improve.

Neil Wilson, senior market analyst at ETX Capital, said: "The Fed stuck to its guns, raising rates by a quarter point and calling for another hike this year, in spite of some pretty awful inflation earlier that has the market doubting the central bank's willingness and ability to tighten again in the near-term".

They forecast US economic growth of 2.2 percent in 2017, an increase from the previous projection in March. Mr. Kashkari has argued that economic conditions are not strong enough to justify raising the benchmark rate. "The Committee now anticipates reducing the quantity of reserve balances, over time, to a level appreciably below that seen in recent years but larger than before the financial crisis", the FOMC said.

Precious metals futures were mostly down today on the rate hike.

  • Zachary Reyes