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Federal Reserve Raises Interest Rate Slightly

15 Juin 2017

The Federal Reserve raised interest rates on Wednesday for the second time in three months, citing continued U.S. economic growth and job market strength, and announced it would begin cutting its holdings of bonds and other securities this year.

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

Fed officials voted 8-1 on Wednesday to raise the target level for the rate, a key benchmark for consumer and business lending, to between 1 percent and 1.25 percent.

The message the Fed sent on Wednesday was upbeat: It believes the USA economy is on firm footing as it enters its ninth year of recovery from the Great Recession.

The central bank is also still on track to raise rates one more time this year, according to the FOMC's projections which have remained unchanged since its March meeting, despite the market expecting today's decision to be the last hike of 2017.

With the jobless rate cut from 10 percent to just 4.3 percent recently, the recovering economy no longer needs so much help from low interest rates. In addition, the rate of inflation is one of two primary variables the Fed weighs when making monetary policy decisions, the other being unemployment. In term of the federal funds rate, the FOMC median figures are consistent with three additional rate hikes in both 2018 and 2019. The reductions would begin this year "provided that the economy evolves broadly" as Fed officials are forecasting, she said.

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Since rates began rising again, Amis has been advising retirees and others with fixed-income investments like bonds to ensure that their portfolios are balanced between very short-term and long-term bonds.

Citing recent inflation declines, greater household spending, and a steady job market, the Fed voted almost unanimously to increase the interest rate; as in March, when rates rose from 0.75% to 1.0%, Minneapolis Fed president Neel Kashkari was the lone holdout.

In a sign of confidence, the Fed upgraded its forecast for USA economic growth and unemployment this year. The plan calls for gradually reducing these holdings in ways that do not disrupt markets. If it does hike another time or two without higher inflation or stronger economic growth to support it, investors could "become unnerved", he says.

The post-meeting reaction shows how the Fed's determination to boost rates may be winning over bond traders who had doubted the central bank's resolve. 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. Hawks tend to worry that rates kept too low for too long could escalate inflation or fuel asset bubbles. "Most major advanced economies have been suffering from low inflation since the global financial crisis", wrote Kashkari in an explanation of his dissent from the March rate hike. So far, Trump has sent conflicting signals about whether he plans to nominate her for a second term.

The dollar index had fallen to as low as 96.323 on Wednesday, having shed almost six percent on the year, before bouncing back a tad on the Fed's policy tightening.