Federal Reserve Continues To Normalize Monetary Policy

Fed Chairwoman Janet Yellen and her colleagues laid out a plan to shrink the central bank's massive $4.5 trillion balance sheet starting this year, as they raised a key USA interest rate. The Fed previously raised rates in March, and on Wednesday, it signaled plans for one more rate increase this year. Most analysts believe the Fed will raise the federal funds rate — what banks charge each other for short-term loans — for the second time this year.

Fed officials now expect the US unemployment rate to end the year at 4.3 percent, down from the 4.5 percent they predicted in March.

Fitch Ratings said the U.S. Federal Reserve's (Fed) interest rate hike and comments yesterday reinforced its view that U.S. interest rates will normalise faster than financial markets expect. The post-meeting statement said inflation "has declined recently" even as household spending has "picked up in recent months".

The S&P 500 fell 0.1 percent, after fluctuating for most of the session, while the tech-heavy Nasdaq indexes retreated 0.4 percent.

"The committee now expects to begin implementing a balance sheet normalisation programme this year, provided that the economy evolves broadly as anticipated". "But shrinking balance sheet would boost the dollar in the long run", the trader said, noting the Fed's plan to reduce its portfolio would "inevitably" pile pressure on the Chinese yuan.

On the economic front, in the week ending June 10, the advance figure for seasonally adjusted initial claims was 237,000, a decrease of 8,000 from the previous week's unrevised level of 245,000, said the U.S. Labor Department Thursday.

Fed officials have been trying to get inflation to rise to a low but manageable rate of about two percent.

Greg McBride, an analyst with consumer financial site Bankrate.com, tells NPR's Yuki Noguchi that, taken together, the Fed's moves have caused home equity and auto loan rates to increase about 1 percentage point over the last two years.

Asked about the criticism, Yellen said, "I don't think.The Fed's credibility has been impaired".

The Fed confirmed that it will proceed to trim its $4.5 trillion balance sheet this year.

In any event, interest-rate projections for 2018 and 2019 are becoming less reliable guides to future policy amid the likelihood that the Fed's Board of Governors will see a major makeover in the next year.

  • Zachary Reyes