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Fed hikes rates third time in six months

15 Juin 2017

NEW YORK, June 14 (Reuters) - Long-dated U.S. Treasury yields tumbled to their lowest since early November on Wednesday after surprisingly weak data on inflation and retail sales overshadowed an interest rate hike by the Federal Reserve.

"The committee now expects to begin implementing a balance sheet normalization process this year, provided the economy evolves broadly as anticipated", according to a post-meeting statement quoted by CNBC.

"In view of realized and expected labor market conditions and inflation, the Committee made a decision to raise the target range for the federal funds rate to 1%-1.25%". 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 manoeuvr".

"In view of realized and expected labor market conditions and inflation, the [Federal Open Market] Committee chose to raise the target range for the federal funds rate to 1 to 1-1/4 percent", according to a statement by the Fed.

Kim Hyo-sun, Arirang News.

The dollar struggled to find direction after the FOMC decision as it dropped to a 2-month low of 108.77 yen immediately after the announcement before climbing to 109.86 yen as Yellen spoke in her press conference.

It expects to begin the normalization of its balance sheet this year, gradually ramping up the pace.

"The Committee now expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated", said the Fed in the statement.

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So when people say that the Fed shouldn't be raising rates when inflation is so low, Yellen just shrugs and said: Just you wait.

In the wake of several soft inflation readings, Fed officials also lowered their median forecast for inflation this year.

According to their forecast, there will be one more rate hike this year, and three more next year. By then, the Fed's forecast would put its key policy rate at 3 per cent. The unemployment rate fell to 4.3% in May, its lowest level since 2001.

The central also updated its projections for inflation to take account of a slowdown.

The Fed stepped up policy late last year, voting to carry out the first and only hike of the year, while signaling three hikes in 2017, in December.

Yellen would not comment on her future beyond her intention to serve out her term as chairwoman, which ends next February.

Regarding inflation, the Fed sees it stabilizing but remaining below 2 percent (y/y) in the next 12 months. However, should inflation continue missing, we would expect the Fed to pare back its rhetoric and likely further lower its projections for the natural rate of unemployment. Hiking interest rates is a tool that policy makers use to keep the economy from overheating or to dampen a bubble.

The betting is that the administration will choose officials who will tilt the Fed toward a more "hawkish" stance.