Fed raises rates, gives details on balance sheet reduction


Reaction was muted on financial markets to the Federal Reserve's latest rate increase, which was widely expected by investors.

Fed chair Janet Yellen told reporters at a news conference it would take "a few years" to complete but insisted that overall policy was not on a pre-set course.

The U.S. central bank cited continued U.S. economic growth and job market strength, proceeding with its first tightening cycle in more than a decade. Both notched deeper declines earlier after consumer price data came in below forecasts, sowing doubt about the strength of the USA economy.

"With the Fed stating its intentions to start reducing the size of the balance sheet this year, it is offering a clear vote of confidence for the economy", said Curt Long, chief economist of the National Association of Federally Insured Credit Unions.

The Fed's leaders say they expect the world's largest economy to grow at a 2.2 percent annual rate this year, and expand a bit more slowly in 2018 and 2019.

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Meanwhile, the inflation rate is still below the 2 percent level that the Fed deems necessary for a healthy, growing economy and stable prices.

US stocks edged lower and prices of US Treasuries pared gains after the Fed's policy statement.

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.

"The committee now expects to begin implementing a balance sheet normalisation program this year, provided that the economy evolves broadly as anticipated", it said. Those limits would ultimately rise to a maximum of $30 billion per month for Treasuries and $20 billion per month for mortgage securities. Unemployment has already reached a 16-year low of 4.3 percent.

In a June 2 Reuters poll, six of 17 primary dealers thought an announcement would come in September, while the rest forecast it would occur at the last policy meeting of 2017. The rate sets what banks can charge each other for overnight loans and influences the availability and flow of money in the US economy.

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The Fed's Federal Open Market Committee indicated it made the decision based on continued strengthening of the labor market and moderately rising economic activity.

Under the plan it unveiled, the Fed would start with monthly reductions in Treasury holdings of no more than $6 billion and $4 billion in mortgage bonds. The Dow Jones industrial average gained 0.22 percent or 46.09 points to close at 21,374.56. Similarly, if you're a retiree living in part off of bond interest income, the quarter-point rate hike won't solve your money problems. Since officials raised rates in March, the unemployment rate has dropped to 4.3% from 4.7%.

Fed policymakers stuck with forecasts pointing to further rate increases in the coming years, including a further quarter-point increase by the end of 2017.

The Fed in recent years has been equally consistent in predicting 2 percent inflation, and in being wrong.

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