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Fed raises rates and outlines balance sheet reduction plan

15 Juin 2017

But the U.S. central bank acknowledged that the preferred inflation measure will remain below the two percent target for some time.

The PBOC later said it was keeping the rate for seven-day reverse repos at 2.45 percent, the 14-day tenor at 2.60 percent and the 28-day tenor at 2.75 percent.

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. According to their forecast, there will be one more rate hike this year, and three more next year.

United States stocks rose slightly after the Fed announcement while the dollar reversed some of its earlier losses though bond yields moved little.

In a statement released Wednesday, the Fed said that the labor market strengthened in May, while the overall economy has been rising at a moderate pace this year.

Gold turned negative after the Fed rate increase.

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"There is a lot to digest, and even some apparently conflicting signals, such as the fact that the Fed revised its own inflation outlook slightly down and yet kept its intention to raise rates again this year", said Mitsuo Imaizumi, Tokyo-based chief foreign-exchange strategist for Daiwa Securities.

By 0743 GMT in London, the Canadian, New Zealand and Aussie dollars were all a quarter of a percent higher on the day against their U.S. counterpart at respectively C$1.3209, $0.7237 and $0.7558.

The dollar index, which tracks the U.S. currency against a basket of six rivals, was flat on the day at 96.932 but above its overnight low of 96.323 plumbed after downbeat economic figures. Importantly, the central bank didn't specify a timetable for introducing the caps, saying only that it expected to begin decreasing reinvestments this year.

While a narrower interest rate differential with the US should pressure the yuan, it was little changed in spot trade on Thursday at 6.7939 per dollar by midday.

HONG KONG: The Hong Kong Monetary Authority raised interest rates after the Fed's move, to help keep the territory's currency at a stable rate against the us dollar. Only Neel Kashkari, president of the Minneapolis Fed bank, opposed the increase. Inflation is shaping up to be lower than the Fed had hoped to see, but GDP growth and employment projections for 2017 were both improved from those made after the March Fed meeting. Fed Chair Janet Yellen stated her view in a press conference that the economy appears strong enough to withstand additional rate hikes, barring new indications of economic weakness. Inflation was expected to be at 1.7% by the end of this year, down from the 1.9% previously forecast. "I would think that at some point the market is going to be pricing in even greater risks that the Fed might be moving too quickly", said Mark Cabana, head of USA short rates strategy at Bank of America Merrill Lynch in NY. They continue to expect the economy to grow 2.1 percent next year and 1.9 percent in 2019.

"If it turns out there is a surprise and a substantial reaction that is something we would have to take into account in deciding the appropriate stance of policy".

Fed raises rates and outlines balance sheet reduction plan