Fed raises rates and outlines balance sheet reduction plan

"A more dovish surprise, however, could generally see equity markets rallying strongly and especially emerging markets and currencies doing so, which are a bit more sensitive, traditionally, to the Dollars direction (and as the global currency is the USD, a dovish Fed is positive for global liquidity)".

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. The 10-year Treasury yield has fallen from 2.446% at the end of 2016, countering against the consensus trade leading into 2017 that yields would extend their climb in late 2016.

Soft inflation numbers are unlikely to prompt a mass retreat by Fed policymakers from their March forecast that there will be three rate rises this year, including the move in March.

China's industrial production and retail sales increased at a steady pace in May, while property investment growth softened signaling a slowdown in overall activity in the second quarter.

The bank also said it would begin cutting its bond holdings and other securities this year.

One key question for bond traders is how officials will address the outlook for inflation.

Investors are expecting a rate increase mostly since Fed officials have told them to therefore their focus will be on the prospect for policy mainly when the central bank will start to lessen its huge portfolio of U.S. debt.

"It reflects the progress the economy has made", Fed chair Janet Yellen said at a press conference.

The Fed's quarterly projections show they still anticipate making a third rate increase this year, with the median federal funds rate ending 2017 at 1.4 percent. For investors, that would fuel wagers that the Fed will pause after June.

"It won't stop the Fed from hiking interest rates later today, but it increases the downside risks to our forecast that there will be a further two rate hikes in the second half of this year", said Paul Ashworth, chief US economist at Capital Economics in Toronto.

The Fed holds its fourth of eight FOMC meetings of the year this Tuesday and Wednesday (June 13-14, 2017). In part, the recent rise in negative-yielding debt is down to exchange rates, with the euro and the yen-which account for a lot of negative-rate bonds-rallying against the dollar.

"The weak data certainly adds to the drumbeat of one hike and done for the year", said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. Futures showed Wall Street opening with modest gains.

In the base-case scenario, officials would emphasize that recent disappointing data will prove transitory, according to TD. A key theme in today's bond market is the rise in issuance of "reverse Yankee bonds" - these are bonds that are issued by U.S. corporates in the Euro-denominated bond market. "The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run".

"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. There would also be no change to the dot plot. In BMO's hawkish Fed decision, yields on two-, three- and five-year notes rise by about 9 basis points.