Fed Hikes Interest Rates Despite Declining Inflation

  • Fed Hikes Interest Rates Despite Declining Inflation

Fed Hikes Interest Rates Despite Declining Inflation

America's central bank, the Federal Reserve, is widely expected to raise interest rates today - to a target range of 1% to 1.25% (from 0.75% to 1%). USA inflation data later in the day will also attract attention. I know they say they're data dependent.

Any signal that the USA central bank is moving towards a reduction in its holdings of more than US$4 trillion in Treasuries and mortgage-backed securities might have some more impact.

For agency debt and mortgage-backed securities, the cap will be $4 billion per month initially, increasing by $4 billion at quarterly intervals over a year until it reaches $20 billion per month.

Fidelity investment director Tom Stevenson said "there was never much doubt" regarding today's rate rise. Minutes from the Fed's last meeting also said policymakers had backed a strategy of phasing out reinvestment of the proceeds of maturing securities. The Fed may, therefore, have to feel its way towards the ultimate balance sheet size by gauging banks' demand for reserves.

The Fed slashed interest rates to 0% in December 2008 to aid the faltering housing market and economy. Should the Fed keep pushing up short-term policy rates, they risk creating a "yield curve inversion" - where short-term rates are higher than long-term ones, which is a key indication of a pending recession.

The Fed's revised forecasts reduced its estimate for unemployment by year's end to 4.3 percent from a March projection of 4.5 percent.

"But what is more anticipated are the accompanying materials, like the Fed's latest forecasts on inflation, employment and the "dot plot" forecasts of where the Fed sees policy rates from here", he said. Longer-run market expectations have also fallen since March.

The S&P 500 was down 1.67 points, or 0.07 per cent, at 2,438.68 and the Nasdaq Composite was up 3.90 points, or 0.06 per cent, at 6,224.27.

Fed officials, on the other hand, have penciled in rates at 3.0 percent.

"It's a Fed day and the markets will likely not blink an eye as the FOMC raises rates by 25 basis points", said Peter Cardillo, chief market economist at First Standard Financial in NY.

Minneapolis Fed President Neel Kashkari dissented in Wednesday's decision.

The dollar, meanwhile, "is positioned to take advantage of any hawkish comments from the FOMC", said Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank.

But inflation has weakened.

Since then, inflation has ticked lower, due only in part to an idiosyncratic decline in wireless phone plans.

A separate measure of inflation released Wednesday by the Labor Department showed price pressures remained muted in May, with more broad-based softness in categories that include used cars and apparel. Barring a big change of heart this suggests a quarter-point rate increase is likely to be announced on Wednesday.

U.S. stocks edged lower and prices of U.S. Treasuries pared gains after the Fed's policy statement. The Fed still foresees prices, as measured by a gauge tied to consumer spending, rising 2 percent in 2018 and 2019, achieving its target. However, while the unemployment rate sank to 4.3% in May, its lowest level in over a decade, non-farm payrolls grew by a disappointing 138,000.