US Federal Reserve hikes rates again as confidence in the economy grows

Gladys Abbott
June 15, 2017

The central bank bulked up its holdings to about $4.2 trillion in assets, including a lot of Treasury bonds and mortgage-backed securities, beginning during the dimmest days after the Panic of 2008 to stave off an even deeper depression.

The benchmark lending rate was lifted by a quarter percentage point to a target range of 1 per cent to 1.25 per cent. The Fed has kept its key interest rate at unprecedented low levels for years in an effort to help the economy recover from the Great Recession. The move follows a record run of jobs growth in the U.S. that has driven the unemployment rate down to its lowest level in 16 years.

Leila Butt, a senior economist at Prudential Portfolio Management Group, said: "As anticipated, the Fed has hiked rates for the second time in 2017 and we'd expect it to do so again before the year is out, as it also begins to shrink its balance sheet".

That would be followed by three rate increases in 2018 and three more in 2019, with the key rate at 2.9 per cent by the end of that period.

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. It also affirmed plans to begin trimming the size of its balance sheet, reducing holdings of bonds and other securities it had been hoovering up to provide the USA economy with extraordinary levels of support.

Uncertainty also surrounds the membership of the Fed's own policy committee. Starting sometime this year, Yellen says the Fed will start gradually reducing those holdings by as much as $600 billion a year.

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YUKI NOGUCHI, BYLINE: Today marked the fourth time the Fed has raised interest rates since December of 2015 when it deemed the economy finally healthy enough to withstand an interest rate higher than near-zero.

Officials at the USA central bank also cut their inflation forecast, one of the final indicators to pick up momentum over the past few years.

The Nikkei ended 0.3 percent lower at 19,831.82, after briefly entering positive territory in early morning trade.

Some news reports have mentioned leading candidates to fill the three vacancies on the Fed's seven-member board. Marvin Goodfriend, an economist at Carnegie Mellon University, has been mentioned for another board spot, and Robert Jones, chief executive of Old National Bancorp in IN, reportedly is a candidate for a board seat designated for a community banker.

Officials worry that keeping rates too low for too long could spark a burst of inflation that could hurt the economy.

Fed said the timing and size of future adjustments will depend on the committee's assessment of realised and expected economic conditions relative to its employment and inflation targets.

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