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Fed lifts interest rates and eyes reduction in holdings of bonds

17 Juin 2017

The Federal Reserve has signalled it will increase short-term rates once more before the end of the year and three times next year. According to the Hyundai Research Institute, a 0.25 percentage point hike in rates could raise interest by 420,000 won per year for each household.

The central bank also confirmed that later this year it would begin 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.

Naeem Aslam, chief market analyst at ThinkMarkets, said: "Simply put, the Fed is just fearless and they are not afraid of turning up the heat". The FTSE 100 appeared on the back foot after those difficulties in foreign markets, also remaining under pressure because of fears that the Brexit deal negotiations are likely to leave the United Kingdom walking away with a less than optimal trade and economic deal.

While the hike was widely expected, some investors said the central bank's tone was more hawkish and that raised concern about the pace of US economic growth.

Butterfield, however, did not say if the change would mean an increase in interest rates on savings at the bank.

In addition to raising rates, as had been widely expected, the Fed on Wednesday also unveiled plans to start slowly shrinking its balance sheet this year and updated forecasts showing that officials still have a third hike penciled in for 2017.

The Federal Reserve, for its part, seems to believe that the economy is strong enough for money to be more expensive, including real estate financing. For more information about the Fed's balance sheet, please read Inside the Fed's Balance Sheet (The Biggest in the World).

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In a sign that the squeeze on consumers may get tighter before long, three Bank of England policymakers voted to raise rates, against five who preferred keeping rates on hold.

Rising interest rates will eventually affect millions in the USA from buyers of home to those with credit cards to those saving money.

"The run of weaker core inflation readings has clearly rattled some Fed officials", Capital Economics wrote in a note to clients earlier on Friday.

They lowered projections for 2017 to 1.6% from their March estimate of 1.9%.

The president wants $1 trillion worth of work on the ground and we expect to give it to him. The Fed, he said, may be "erroneously" forecasting an increase in inflation based on tight labor markets, making a mistake that could lock the us economy into lower inflation for longer.

Even though Shiller believes investors should keep buying stocks here at home and aboard, he acknowledges that a recession could still come at any time.

Fed lifts interest rates and eyes reduction in holdings of bonds