The U.S. Federal Reserved raised its short-term interest rates on Wednesday by one quarter of one percent.
The Fed said a recent softening in inflation was seen as transitory, but the latest tepid price readings made investors question its view that the USA economy is continuing to improve. The central bank bulked up its holdings to about $4.2 trillion in assets, including a lot of Treasury bonds and mortgage-backed securities, beginning during the dimmest days after the Panic of 2008 to stave off an even deeper depression.
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 second half of this year will be all about kicking off changes to the balance sheet reinvestment programme which in itself could have a small tightening effect for the overall economy'. Initially, the caps will be set at $6 billion per month for Treasuries and $4 billion per month of MBS. Softening commodity prices did little bolster arguments that inflation will pick up the pace, even as the US labor market remains on strong footing - raising the specter that central bank officials made a policy error.
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Stocks were also weighed down as Brent crude remained under 47 United States dollars a barrel, down another 0.1% at 46.84 U.S. dollars and languishing at the lowest level for almost a year.
"With financial conditions remaining supportive. and U.S. financials breaking higher, the Fed may see little reason to moderate its rate hike projections when meeting today", strategists at Morgan Stanley said in a note to clients.
"Having spent most of the last six weeks preparing the market for yesterday's rate rise the Federal Reserve would have been unwise to demur at this late stage, however yesterday's weak inflation numbers, coming on the back of a weak first quarter are likely to be a cause for concern", Michael Hewson, chief market analyst at CMC Markets in London, said by e-mail. The central bank had pushed rates to near Zero in response to the financial crisis.
They increased their projections for economic growth this year to 2.2 percent from the 2.1 percent they forecast in March. Inflation was expected to be at 1.7% by the end of this year, down from the 1.9% previously forecast.
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Now the Fed said the inflation will be below its 2 percent target. Earlier on Wednesday, the Labor Department reported consumer prices unexpectedly fell in May, the second drop in three months.
The market is expecting one more rate hike by the Fed in the current fiscal year.
Bloomberg poll revealed that only 5 of 100 economists surveyed expected the FED to maintain the interest rate in the prior range of 0.75-1 percent. Minneapolis Fed President Neel Kashkari dissented in Wednesday's decision.
Fed chairperson Janet Yellen said the move reflects progress made by the economy.
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RATE HIKE: The Federal Reserve raised interest rates for the third time since December, something investors had widely expected based on the Fed's recent statements.
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