Gold Drops Near USD1260 As Fed Raises Rates

Gladys Abbott
June 21, 2017

"In view of realised and expected labour market conditions and inflation, the FOMC (Federal Open Market Committee) chose to raise the target range for the federal funds rate to 1 to 1.25 per cent", the American central bank said in a statement after concluding its two-day monetary policy meeting. Yellen also indicated that a third rate hike is likely for this year during the quarterly press conference.

Europe's benchmark bond yield held near seven-week lows ahead of the Fed decision. They fell as low as 2.103 percent following the downbeat data, their lowest since November 10. It is also cited that U.S. economic growth and job market strength as reasons for raising its standard interest rate.

Those rate moves, while modest, were accompanied by regulatory crackdowns on riskier forms of financing and shadow banking, which have tightened credit conditions and led to China's bond curve inverting in recent months.

After gaining support from weak United States data on Wednesday, there was a sharp reversal after the firm Fed policy statement as the dollar gained renewed support.

Other data also could be worrisome.

Still, if sustained, rising funding costs are expected to translate into higher borrowing costs eventually, dragging on business activity. They estimated that there was a 95% chance the central bank would increase rates following its meeting of two-days that ended Wednesday. It would start implementing those policies this year, assuming economic growth continues.

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The markets didn't exactly jump at the news either.

Euro zone government bond yields rose, reflecting post-Fed moves in U.S. Treasuries, whose yields had earlier fallen after weaker-than-forecast inflation and retail sales data triggered alarm about the underlying health of the U.S. economy.

The economy grew at a 1.2 percent annualized rate in the first quarter, slowing from the 2.1 percent pace in the October-December period.

"The market was stable". However, mortgage rates are not expected to increase immediately.

"The market is taking this as a little more hawkish statement". One-year NDFs are settled against the midpoint, not the spot rate.

But Deng Haiqing, chief economist at JZ Securities, said the decision was "debatable". There was only one rate increase in both 2015 and 2016. Instead, it put great weight on labor market data that showed the unemployment rate had fallen 0.4 percentage point since the March meeting to 4.3% in May, a level that the Federal Open Market Committee (FOMC) believes represents full employment. These rates are well below the Trump administration growth goals of 3 percent a year.

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