One more hike on cards as upbeat Fed raises rate

Top News | Jun 16, 2017
The Federal Reserve has raised its key interest rate for the third time in six months, providing its latest vote of confidence in a slow-growing but durable economy.

The Fed also announced plans to start gradually paring its bond holdings later this year, which could cause long-term rates to rise.

The increase in the Fed's short-term rate by a quarter-point to a still-low range of 1 percent to 1.25 percent could lead to higher borrowing costs for consumers and businesses and slightly better returns for savers. The Fed foresees one additional rate hike this year but gave no hint of when that might occur.

The overarching message the Fed sent was an upbeat one: it believes the US economy is on firm footing as it enters its ninth year of recovery from the Great Recession, with little risk of a recession.

Though the economy is growing sluggishly and inflation remains chronically below the Fed's 2 percent target, it foresees improvement in both measures over time. And the most important pillar of the economy - the job market - remains solid if slowing, with unemployment at a 16-year-low of 4.3 percent - even below the level the Fed associates with full employment.

"We anticipate reducing reserve balances and our overall balance sheet to levels appreciably below those seen in recent years but larger than before the financial crisis," said Fed chairman Janet Yellen.

The announcement that the Fed plans to begin paring its balance sheet later this year - "provided that the economy evolves broadly as anticipated" - involves its enormous portfolio of Treasury and mortgage bonds.

The Fed began buying the bonds after the Great Recession to try to depress long-term loan rates. That effort resulted in a five-fold increase in its portfolio to US$4.5 trillion (HK$35.1 trillion).

The Fed provided no date for the start of the bond sales but said that if the economy fares as expected, "we could put this into effect relatively soon." The Fed also issued updated economic forecasts that showed it foresees one additional rate increase this year to follow Wednesday's increase and an earlier rate hike in March.

The rate forecast, based on individual projections from each member, envisions three more rate hikes in 2018 and three more in 2019. By then, the Fed's forecast would put its key policy rate at 3 percent.


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June 2017