Published: Wed, June 28, 2017
Money | By Armando Alvarado

United States stocks open lower after Fed rate hike

United States stocks open lower after Fed rate hike

The Fed statement pointed to another rate increase in 2017 and three additional 25 basis point increases in 2018 as the central bank remained committed to a "neutral" interest rate of 3%.

It was the second time the Fed has raised rates this year after the first hike in March.

Fed futures markets now put the chances for another rate increase this year to below 50 per cent. Stock and bond prices weakened after the Fed's moves as some investors anxious that the actions would throttle back economic growth. It also increases skepticism that the Fed will raise interest rates in the second half of the year. U.S. Federal Reserve on Wednesday raised the benchmark interest rates for the fourth time since December 2015, and unveiled plans to start trimming its balance sheet.

Meanwhile, in view of stable economic conditions, the Fed plans to reduce its 4.5-trillion-U.S. -dollar balance sheet later this year and unveiled a detailed plan to trim its bond holdings.

"We don't think the recent data call for a major change in the Fed's policy outlook, as they have have broadly offsetting implications for the policy outlook in standard Taylor rules".

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"The committee now expects to begin implementing a balance sheet normalisation program this year, provided that the economy evolves broadly as anticipated". That's the level the Fed believes is a neutral rate - neither stimulating growth nor restraining it. They are just catching up with reality: The jobless rate has dropped with unexpected speed — to a 16-year-low 4.3 percent in May. Though the economy is growing only sluggishly and though inflation remains chronically below the Fed's 2 per cent target, it foresees improvement in both measures over time.

Yellen told reporters that the Fed wants the balance sheet contraction "to run quietly in the background over a number of years".

And for this year they are sticking with their prediction that there is likely to be one further quarter point rate rise if economic trends continue. The BoE might underestimate the recent spike in prices, but if two or three MPC members see a need to follow the Fed by hiking rates the pound will appreciate sharply.

Yellen would not comment on her future beyond her intention to serve out her term as chairwoman, which ends next February. The Bloomberg Dollar Index fell 0.2 percent, paring a decline of as much as 0.7 percent after Yellen reiterated the Fed's intention to raise rates as data improve, even as inflation readings miss expectations.

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