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Principale » Rate Rises Again in Second of 3 Expected Hikes

Rate Rises Again in Second of 3 Expected Hikes

15 Juin 2017

While the market seems to interpret rate hikes as too hawkish from an inflation perspective, one could make the case they are too dovish given low unemployment rates.

"The decision to raise rates does not signal the beginning of "tight" monetary policy from the Fed, but it does mark another step towards normalisation, as well as confidence in the long-term recovery of the economy". In Britain, the Bank of England saw three of its eight rate-setters vote for a rate increase, a fact that suggests a hike is much closer than many investors had expected.

A Reuters poll of 21 of the 23 primary dealers that do business directly with the Fed showed 14 of them now believed it would announce the start of its balance sheet normalisation at its September 19-20 policy meeting.

USA stocks mostly fell while the dollar cut its losses on Wednesday after the Federal Reserve delivered a widely expected U.S. interest rate hike.

"It is hard for investors to imagine that the us economy will recover from the first quarter and inflation will rise anytime soon", Daiwa's Takahashi said.

"While the economy is bouncing back from a weak first quarter, earnings have been strong and even in the wake of continued political uncertainty, corporate confidence remains secure".

"The unemployment rate has dropped by half a point in the past four months, but the Fed now expects, comically, no further decline across the rest of the year". The committee had indicated this could only happen once the process of raising rates was "well under way". The Fed also appears not to expect labor force participation to increase meaningfully.

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The central bank also confirmed that it will begin later this year to implement a plan to reduce the size of its investment holdings, which were built up to record levels during the financial crisis to help support the economy, especially once interest rates reached zero.

According to the plan, the Fed will set a set of gradually increasing caps on the amount of the Treasury and agency securities that would be allowed to run off each month.

The Fed provided no date for the start of the bond sales but said that if the economy fares as expected, "we could put this into effect relatively soon". It fell $1.73, or 3.7 percent, to settle at $44.73 a barrel in NY.

The yuan is now up 2.3 percent so far in 2017 - with almost half of that seen in recent weeks - after tumbling 6.5 percent past year. The Fed still foresees prices, as measured by a gauge tied to consumer spending, rising 2 per cent in 2018 and 2019, achieving its target.

Yellen, whose term as central bank chairwoman expires in February, refused to discuss her own future. 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".

That said, much of the market's concern was born in the hours prior to the Fed statement, when data showed that core USA inflation eased to a two-year low 1.7% and retail sales only grew at a 0.3% pace.

In the oil space, Oil Search and Santos are lower by nearly 3 percent each, while Woodside Petroleum is down nearly 2 percent.