US Federal Reserve announces interest rate rise and reveals plans to sell down bond holdings

 
Oliver Gill
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Federal Reserve Chair Janet Yellen Holds News Conference
An interest rate hike announcement by Janet Yellen was widely expected by markets (Source: Getty)

The US Federal Reserve today raised its headline interest rate by 0.25 per cent.

The Fed announced plans to raise the target range for the federal funds rate to between one and 1.25 per cent.

An increase was widely expected, with markets pricing in a near-100 per cent chance of a hike in the hours running up the decision.

It represents only the fourth upwards move in the federal funds rate since before the financial crisis, as the world’s most important central bank takes a cautious approach to the "normalisation" of monetary policy.

Read more: Fed signals it is close to rate hike

In a statement issued at 7pm UK time, the Federal Open Market Committee (FOMC) said:

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.

However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The central bank left the target for the federal funds rate, the interest rate offered to other banks, between 0.75 and one per cent at the last meeting in May.

Read more: The Fed leaves rates unchanged and says slow US growth will be temporary

Of particular significance for many were Fed plans to implement a "normalization program" later this year. Such a strategy will see a reduction in the US central bank's quantitative easing programme.

The statement continued:

The committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.

This program... would gradually reduce the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities.

Chink of light

Fidelity investment director Tom Stevenson said "there was never much doubt" regarding today's rate rise.

Meanwhile Dennis de Jong, managing director at UFX.com, said: “Today’s second rate rise of 2017 provides a chink of light in what has been a fairly gloomy day on Wall Street.

“Weaker than expected inflation and retail sales data sent the dollar tumbling, but the Fed’s decision to increase the base rate for borrowing should shore things up a little."

US government borrowing rates nosed up in the immediate aftermath of the FOMC statement.


(Source: Bloomberg)

He continued: “Many are expecting at least one more rate rise this year, although that is certainly not a given. Donald Trump is meeting stiff opposition in implementing campaign promises on tax reform, financial deregulation and infrastructure spending, which could well curtail growth in the world’s largest economy.”

Read more: The Fed has hiked interest rates, sending the dollar tumbling

Meanwhile, Stevenson highlighted impact of the "normalization program", he said;

More important was what the US central had to say about its plans to rein in its bloated balance sheet, which has ballooned to $4.5 trillion since the financial crisis as the Fed has bought government and mortgage-backed bonds to underpin the American economy.

"The Fed said today that it would decrease reinvestment of maturing bonds at a steadily increasing rate until after a year it is holding back $30bn a month on Government bonds and $20bn on mortgage backed securities."

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