US markets, including gold and oil, bounced higher in the wake of the US Fed’s much anticipated decision to raise its key interest rate for a third time in a decade.
According to Reuters the Fed stuck to a forecast of two more rate rises this year, and three next year, but the Financial Times and Bloomberg claimed the Fed was signally three increases this year.
Whatever, that saw the US dollar edge lower, Wall Street rise modestly, along with gold which was up 1.5% to $US1,218 an ounce, and US oil which jumped by more than 2.4%, to $US48.90 a barrel, but more boosted more by a surprise fall in US oil inventories.
And as the US dollar weakened, the Aussie dollar leapt more than 1.2 US cents cent after the 5am (Sydney time) announcement by the Fed to trade at 77.15 US cents after 7am in Asian trading.
The Fed lifted the target range for the federal funds rate to 0.75% to 1%, and only one member of the Open Markets Committee — Neel Kashkari of the Minneapolis Fed — dissented from the vote for a rise, arguing in favour of unchanged rates.
However, the Fed’s policy-setting committee did not reveal any plan to step up the pace of monetary tightening, even though the post meeting statement did signal that inflation had risen in recent months.
Although inflation is “close” to the Fed’s 2% target, it noted that goal was “symmetric,” indicating a possible willingness on the part of the central bank to allow prices to rise at a slightly faster pace.
Economists said there was no change in its stance from the December meeting with many key economic forecasts maintained.
Economic forecasts released at the same time showed core inflation still under the Fed’s 2% target rate this year and GDP growth of 2.1%, not much stronger than what we saw in 2016 and what was forecast in December.
It said that further rate increases would only be “gradual,” the Fed said in its policy statement, with officials sticking to their outlook for two more rate hikes this year and three more in 2018. The Fed lifted rates once in 2016 – last December.
Fresh economic forecasts released with the statement showed little change from those of the December policy meeting and gave little indication the Fed has a clear view of how Trump administration policies may impact the economy in 2017 and beyond.
“With gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace," the Fed said, maintaining language it has used in previous statements.
The Fed’s projections showed the economy growing by 2.1% in 2017, unchanged from the December forecast.
The unemployment rate Fed officials expect by the end of the year was unchanged at 4.5%, while core inflation was seen as slightly higher at 1.9% versus the previous 1.8% forecast.
And the Fed made clear in its statement that it was not planning to start shrinking the size of its $US4.5 trillion balance sheet by deliberately not rolling over maturing debt.
“The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way,” the statement said.
“This policy, by keeping the Committee’s holdings of longer-term securities at sizeable levels, should help maintain accommodative financial conditions,” this morning’s statement ended.
That was a decision that will be greeted with relief in large sections of the market because many had feared any move to start shrinking the size of the Fed’s balance sheet might trigger a sharp rise in market rates, especially for mortgages where the central bank is a big buyer of securities.
Ms Yellen later told a media conference that the US economy had made “solid” progress toward the Fed’s goals for employment and price stability. And as long as the economy continues to improve as expected, further gradual rate hikes will be appropriate until the fed funds rates reaches its long-run neutral rate of around 3%.
Fiscal policy changes (ie policies from the Trump administration) could alter the outlook, but it’s “too early” to tell how Congress and the White House will change tax, spending and regulatory policies, or how those changes would affect the economy, she added.
