Published: Thu, June 15, 2017
Economy | By Guillermo Lane

Fed Hikes Interest Rates Despite Declining Inflation

Fed Hikes Interest Rates Despite Declining Inflation

But more recently, as the unemployment rate has fallen to just 4.3 percent, inflation has stabilized near the Fed's 2 percent target, and financial market and real estate asset valuations have soared, Yellen and her cohorts have changed their approach. "Near term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely".

The central bank said it would gradually ramp up the pace of its balance sheet reduction and anticipates the plan would feature halting reinvestments of ever-larger amounts of maturing securities.

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

Gold futures rose Wednesday after downbeat U.S. economic data boosted speculation the Federal Reserve will raise interest rates today but refrain from further tightening until year's end. It pointed to solid job gains, a lower unemployment rate, higher household spending and expanded business fixed investment. They also are watching for the Fed's latest views on inflation and hints on how aggressive it will be in raising interest rates in the future. The price index for "core" personal consumption expenditures (an index excluding volatile food and energy prices which is useful for assessing the economy's inflationary momentum) has not been above the Fed's 2 percent target since early 2012, and has not been above it on a sustained basis in a decade.

The Federal Reserve is expected to announce a rate hike at 14:00 EST as well as a statement and updated economic projections. Fed officials previously increased the rate in March to a range of 0.75 to 1 percent. That's the level the Fed believes is a neutral rate - neither stimulating growth nor restraining it. Some economists suggested that even though the Fed foresees one more rate hike this year, the persistently low inflation may lead it to leave rates alone until 2018.

Probable decision of the US Federal Reserve System (Fed) to raise the key rate won't have a big effect on the Azerbaijani manat's rate, John Hardy, Saxo Bank's head of foreign exchange strategy, told Trend June 13.

They forecast U.S. economic growth of 2.2 per cent in 2017, an increase from the previous projection in March.

Fed officials have concluded that the economy, now entering its ninth year of expansion, no longer needs the ultra-low borrowing rates they supplied beginning in the Great Recession.

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That said, no one expects the Fed's rate hikes to turn aggressive.

In recent years, officials faced a recurring predicament in which they signaled a desire to tighten policy only to hold off after the economy underperformed or faced risks from overseas. Good news: 30-year mortgage rates are still very low at about 3.9%.

It forecast U.S. economic growth of 2.2% for 2017 - an increase on its last estimate - but said it would be watching inflation carefully as its main measure was now expected to come in lower than expected at 1.6%.

Since then, inflation has ticked lower, due only in part to an idiosyncratic decline in wireless phone plans. Annual inflation is running at 1.7 percent.

The U.S. central bank is scheduled to release its decision at 1800 GMT on Wednesday with a news conference to follow from Chair Janet Yellen.

Of course, the Fed has been awful at predicting inflation in the past.

It notes that the nations labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Factory output rose 6.5 percent over a year earlier, holding steady at April's rate.

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