Published: Mon, June 19, 2017
Economy | By Annette Adams

Trump budget chief sees Fed continuing accommodative rate policy

Trump budget chief sees Fed continuing accommodative rate policy

The Federal Reserve is widely expected to raise rates in Wednesday's FOMC meeting as futures markets have priced in a 0.25% increase which would see the Dollars carry a 1.25% interest rate.

FOMC expects gradual policy adjustments and expects further strengthening in the labor market. The Hang Seng in Hong Kong dropped 1.2 percent to 25,565.34, but Shanghai's Composite index rose 0.1 percent lower to 3,132.49.

Near term risks to the economic outlook appear roughly balanced, but the committee is monitoring inflation developments closely.

In a statement it said: "The committee now expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated".

They increased their projections for economic growth this year to 2.2 percent from the 2.1 percent they forecast in March.

The Federal Reserve raised its short-term rate a quarter of a percent, to a range between one and 1.25 percent.

Fed futures markets now put the chances for another rate increase this year to below 50 per cent.

The Fed's conviction that it was ready to back away from its unconventional monetary policy caught some traders off guard as bond yields recovered slightly after falling sharply earlier in the day on a weaker-than-forecast report on Consumer Price Index in May.

"The good. More important, we see the worldwide markets finally beginning a six- to eight-year turn", said Christine Armstrong, executive director at Morgan Stanley in Boston.

The Fed also gave a first clear outline on its plan to reduce its $4.5-T portfolio of Treasury bonds and mortgage-backed securities, most of which were purchased in the wake of the Y's 2007-2009 financial crisis and recession.

The FED rate is one of the most effective and at the same time risky levers for raising the American economy. The government has achieved all its goals - unemployment is below 5 percent, inflation is about 2 percent, economic growth is about 1-2 percent.

Fed officials now expect the USA unemployment rate to end the year at 4.3 percent, down from the 4.5 percent they predicted in March.

However, this implied "dot plot" liftoff path is not priced in to markets, which expect a fed funds rate of only 1.5% by year-end 2018.

One member of the Fed dissented: Neel Kashkari, who wanted to keep the federal funds rate unchanged.

Find out how soon the Fed's rate hike will affect you.

Federal Reserve chair Janet Yellen said the rate increase reflected the "progress the economy has made and is expected to make towards the maximum employment and price stability objectives assigned to us by law".

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