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Gold Drops Near USD1260 As Fed Raises Rates

15 Juin 2017

The U.S. Federal Reserve raised interest rates on Wednesday for the second time in three months, a move spurred by steady economic growth, strong job.

The policy makers' release of quarterly economic forecasts is often referred to as the "dot plot" because of the chart indicating the Fed's rate setters' expectations. By contrast, "doves" favour the direction taken under Chair Janet Yellen, favouring relatively low rates to maximise employment. "But the result left the market with lots of questions after weak United States economic data", said Takuya Takahashi, a strategist at Daiwa Securities.

The Fed also mapped out a very gradual approach to shrink its $4.2-trillion holdings of Treasury- and mortgage-backed assets that would allow it to begin as early as September.

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. It finally raised the rate modestly in December 2015, then waited a year do so again.

This latest move by the Federal Reserve on Wednesday means it's going to be more expensive to borrow dollars. Inflation did rise a bit earlier this year and managed to hit the Fed's goal of 2 percent a year but has since fallen back. The forecast for 2018 remained the same at 2.1 percent.

The US jobless rate fell to a 16-year low last month.

The Labor Department reported the rate fell to 4.3 percent in May, the lowest since 2001. In months when Treasury maturities and MBS pre-payments exceed these levels, the Fed would enforce the caps by continuing to purchase these securities to keep the pace of balance sheet reduction predictable.

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New Zealand's two-year swap rate fell 1 basis point to 2.16 percent while the 10-year swap rate fell 6 basis points to 3.10 percent.

The revised economic forecast bowed to reality by reducing its estimate for unemployment by year's end to 4.3 percent from a March projection of 4.5 percent. An eventual increase to the 2% target could occur in the medium term.

The Fed's monetary policy is widely-followed because what the Fed decides to do rates - now at 1.00-1.25%, or 100-125 basis points - sets the tone for other rates, specifically, how your local bank decides to do business.

As long as the economy "evolves broadly as expected", the plan "would gradually reduce the Federal Reserve's securities holdings", the FOMC statement said. It also said it saw recent softening in inflation as transitory.

"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.

Meanwhile, Yellen dodged questions about whether she would stay on for another term if President Donald Trump asks her to stay.

Gold Drops Near USD1260 As Fed Raises Rates