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Friday, 16 June 2017 00:00 - - {{hitsCtrl.values.hits}}
Reuters: The Federal Reserve raised interest rates on Wednesday for the second time in three months and said it would begin cutting its holdings of bonds and other securities this year, signalling its confidence in a growing US economy and strengthening job market.
In lifting its benchmark lending rate by a quarter percentage point to a target range of 1.00% to 1.25% and forecasting one more hike this year, the Fed seemed to largely brush off a recent run of mixed economic data.
The US central bank’s rate-setting committee said the economy had continued to strengthen, job gains remained solid and indicated it viewed a recent softness in inflation as largely transitory.
The Fed also gave a first clear outline on its plan to reduce its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, most of which were purchased in the wake of the 2007-2009 financial crisis and recession.
It expects to begin the normalisation of its balance sheet this year, gradually ramping up the pace. The plan, which would feature halting reinvestments of ever-larger amounts of maturing securities, did not specify the overall size of the reduction.
“What I can tell you is that we anticipate reducing reserve balances and our overall balance sheet to levels appreciably below those seen in recent years but larger than before the financial crisis,” Fed Chair Janet Yellen said in a press conference following the release of the Fed’s policy statement.
She added that the balance sheet normalisation could be put into effect “relatively soon.”
The initial cap for the reduction of the Fed’s Treasuries holdings would be set at $6 billion per month, increasing by $6 billion increments every three months over a 12-month period until it reached $30 billion per month.
For agency debt and mortgage-backed securities, the cap will be $4 billion per month initially, rising by $4 billion at quarterly intervals over a year until it reached $20 billion per month. US stocks edged lower and prices of US Treasuries pared gains after the Fed’s policy statement. The dollar was largely flat against a basket of currencies after reversing earlier losses, while the price of gold fell.
The Fed has now raised rates four times as part of a normalisation of monetary policy that began in December 2015. The central bank had pushed rates to near zero in response to the financial crisis.
Fed policymakers also released their latest set of quarterly economic forecasts, which showed only temporary concern about inflation and continued confidence about economic growth in the coming years.
They forecast US economic growth of 2.2% in 2017, an increase from the previous projection in March. Inflation was expected to be at 1.7% by the end of this year, down from the 1.9% previously forecast.
A retreat in inflation over the past two months has caused jitters that the shortfall, if sustained, could alter the pace of future rate hikes. But the Fed maintained its forecast for three rate hikes next year.
The Fed’s preferred measure of underlying inflation has retreated to 1.5%, from 1.8% earlier this year, and has run below the central bank’s 2% target for more than five years.
Earlier on Wednesday, the Labour Department reported consumer prices unexpectedly fell in May, the second drop in three months.
Yellen indicated the Fed still remained confident inflation would rise to its target over the medium term, bolstered by what she described as a robust labour market that is continuing to strengthen.
The Fed’s estimates for the unemployment rate by the end of this year moved down to 4.3%, the current level, and to 4.2% in 2018, indicating the Fed believes the labour market will continue to tighten.
The median estimate of the long-run neutral rate, which is seen as the level of monetary policy that neither boosts nor slows the economy, was unchanged at 3.0%.
Minneapolis Fed President Neel Kashkari dissented in Wednesday’s decision.
overshadows rate hikeLondon (Reuters): Stocks fell in Europe and Asia on Thursday as investor concern over the pace of US economic growth overshadowed a widely telegraphed rise in Federal Reserve interest rates that lifted the dollar off recent lows.
US stock futures signalled a rocky start on Wall Street after Wednesday’s rate hike and another tumble in tech stocks.
Euro zone Government bond yields rose, reflecting post-Fed moves in US Treasuries, whose yields had earlier fallen after weaker-than-forecast inflation and retail sales data triggered alarm about the underlying health of the US economy.
A Washington Post report that US President Donald Trump was under investigation for possible obstruction of justice added to investor worries and undermined their appetite for riskier assets.
The Fed raised interest rates for the second time this year, by a quarter percentage point to a target range of 1.00-1.25% and forecast one more rise in 2017. Policymakers said the economy was strengthening and that they viewed recent softness in inflation as largely transitory. The US central bank also gave a first clear outline of plans to shed its $ 4.5 trillion bond portfolio built up in three rounds of quantitative easing stimulus. Fed Chair Janet Yellen said this process could begin “relatively soon”.
“They have taken a cautious approach to balance sheet normalisation, but they have begun it and it’s definitely a tightening of policy,” said ING strategist Martin van Vliet. “The meeting was definitely tilted towards the hawkish side.”
European shares opened lower on Thursday, following falls in major indices in Asia. The pan-European STOXX 600 index dropped 0.5%, led lower by the basic resources and oil and gas sectors, as the stronger dollar weighed on metals prices.
Copper fell 0.6 percent to $5,665 a tonne, having earlier hit a one-week low of $5,642, while Shanghai aluminium dropped 1.2% to $13,560 a tonne. MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.7%, led by resource shares.
Japan’s Nikkei fell 0.3%.
Worries that policy tightening measures will weigh on China’s growth, kept Chinese stocks in check. The blue-chip CSI300 index fell 0.2% while the Shanghai Composite Index added 0.1%. In currency markets, the dollar was up 0.2% against a basket of major peers, having earlier traded in negative territory as investors wondered whether the Fed would be able to raise rates again this year.
“Long-term Fed expectations remain very much supported. That is the main reason why the dollar is remaining supported for now,” said Manuel Oliveri, currency strategist at Credit Agricole in London. The euro was down 0.3% at $1.1183, a six-day low , while the yen was flat at 109.58 per dollar. Sterling weakened 0.3% to $1.2717 before a Bank of England policy decision expected to leave interest rates at record lows.
Euro zone government bond yields edged up in early trade. German 10-year yields, the benchmark for borrowing costs in the bloc, rose 1 basis point to 0.24%.
Later in the day, the bond market focus is likely to shift to Greece euro zone finance ministers meet to discuss a deal with the International Monetary Fund that could pave the way for new loans for Athens. Oil prices, which are having a negative impact on inflation worldwide, held steady with global inventories high and doubts over whether the OPEC producers group would be able to implement agreed output cuts.
Brent crude, the international benchmark, was down 12 cents a barrel at $ 46.88.
Gold, sought as a safe investment in uncertain times, rose 0.1% to $ 1,262 an ounce.
