Fed raises rates, unveils cuts to bond holdings in sign of confidence

Fed raises rates, unveils cuts to bond holdings in sign of confidence

Fed raises rates, unveils cuts to bond holdings in sign of confidence

"Washington, Jun 15 The Federal-reserve/6562" target=_blank US Federal Reserve has raised its benchmark interest rate by a quarter point to 1.0- 1.25 per cent and signaled another increase remains likely this year, despite the recent spate of weak economic data.

The rate setting committee of U.S central bank said that the economy had continued to strengthen and job gains have remained solid, which has indicated its views on recent consistency in inflation as largely transitory.

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.

The implementation of its proposed balance sheet normalisation programme – a gradual reduction in Fed's holding of securities - this year, would also depend on how the economy evolves, it added. Fed Chair Janet Yellen said at a press conference after the decision that the unwinding plan could be put into effect "relatively soon", according to news reports. From there, the "cap" will increase by $6 billion every three months over the course of a year until it hits $30 billion a month.

For agency debt and mortgage-backed securities, the cap will be $4 billion per month initially, rising by $4 billion at quarterly intervals over a year until it reached $20 billion per month. When the lending cost was higher in the US than in Korea during the two year period following August of 2005, a total of around 19-point-seven trillion won of foreign capital went out of the local stock market.

That is the highest level since the year 2008 when rates were cut by the policymakers to encourage borrowing and spending after the financial crises. With today's action, the Fed has hiked rates four times since December 2015, for a total of 100 bps, the practical minimum for the central bank to pass its self-imposed test. In a show of confidence, the Fed also upgraded its economic growth forecast and unemployment for the U.S.in 2017.

They increased their projections for economic growth this year to 2.2 percent from the 2.1 percent they forecast in March. The market is expecting one more rate hike by the Fed in the current fiscal year. They continue to expect the economy to grow 2.1 percent next year and 1.9 percent in 2019.

Those factors mean the Fed's preferred inflation measure will remain below the 2 percent target for some time, but will gradually rise to the target level over "the medium term".

The data on Wednesday showed USA consumer prices unexpectedly fell in the month of May and retails sales recorded their major drop in 16 months and this has raised questions about the bank's future progression.