Federal Reserve Continues To Normalize Monetary Policy

Gladys Abbott
June 19, 2017

The US market closed mixed on US Federal Reserve decision. Mortgage rates will be higher, as will credit card interest rates and vehicle loans.

Shortly after the opening bell, the Dow Jones Industrial Average fell 87.86 points, or 0.41 percent, to 21,286.70.

Still, the Fed reiterated its federal funds rate forecast on Wednesday, saying it still expects its benchmark rate to reach 1.4 percent by the end of 2017.

The market is expecting one more rate hike by the Fed in the current fiscal year. US employers continue to add jobs at a steady rate.

The euro was down 0.3 percent at $1.1183, a six-day low, while the yen was flat at 109.58 per dollar. They forecast United States economic growth of 2.2 percent in 2017, an increase from the previous projection in March.

Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.958, 2.48 percent weaker than the midpoint.

The median estimate of the long-run neutral rate, which is seen as the level of monetary policy that neither boosts nor slows the economy, was unchanged at 3.0 percent. Most credit cards and home equity lines of credit are linked to the prime rate, so the rates on those will rise a quarter-point, too.

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RATE HIKE: The Federal Reserve raised interest rates for the third time since December, something investors had widely expected based on the Fed's recent statements.

Fed officials voted 8-1 to raise the federal funds rate to a range of 1 to 1.25 percent.

The Fed's characterization of the state of the economy as "slightly softer" and additional details regarding the unwind in the balance sheet likely took pressure off the central bank to tighten, Specchia added.

As telegraphed in the minutes of the March and May Fed meetings, the committee would like to start reducing its balance sheet later this year and communicate this clearly well in advance with pre-announced caps on the dollar value of Treasury and mortgage-backed securities (MBS) it will allow to roll off each month.

Economic data expected through the course of the trading session includes the Reserve Bank of Australia's bulletin at 9:30 a.m. HK/SIN and China foreign direct investment numbers for the month of May at 3:00 p.m.

With GDP growth expected to remain above its long-term potential over the next few years, and the unemployment rate to remain below its long-run level, the Fed as a whole seems to be willing to look past what it sees as near-term economic noise.

Mulvaney said he hoped Yellen is right in maintaining that the move wouldn't restrict the Fed's ability to conduct monetary policy.

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