Who shall we believe, the Fed or data?

Marco Green
June 19, 2017

The U.S. central bank is widely predicted to nudge up its benchmark rate by a quarter point on Wednesday, to a range of 1 percent to 1.25 percent.

Earlier Wednesday, the Federal Reserve's policy-setting group, the Federal Open Market Committee, offered more details on its plan to start reducing its monthly reinvestments of maturing Treasuries and mortgage-backed securities. The stance of monetary policy remains accommodative, thereby supporting further strengthening of the labour market conditions and a sustained return to 2% inflation.

The Federal Reserve chose to raise the rate despite revising its projections for inflation down to 1.6 percent for this year, less than its target of two percent.

This week brought additional evidence of low inflation and the recent softening has garnered the attention of the Fed, who noted in their statement that they are "monitoring inflation developments closely".

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

They lowered projections for 2017 to 1.6% from their March estimate of 1.9%.

The Fed has now raised rates four times as part of a normalization of monetary policy that began in December 2015. One dealer expected the Fed to leave rates unchanged for the remainder of 2017. "But this was well within our expectations as the rate hike had already been priced in", said a trader at a foreign bank in Shanghai.

Greg McBride, an analyst with consumer financial site Bankrate.com, tells NPR's Yuki Noguchi that, taken together, the Fed's moves have caused home equity and auto loan rates to increase about 1 percentage point over the last two years.

The Bank also outlined its plan of reducing its balance sheet, which it expanded by buying bonds and other securities in order to tackle the housing crisis leading up to the great U.S. financial meltdown in 2008. The government has achieved all its goals - unemployment is below 5 percent, inflation is about 2 percent, economic growth is about 1-2 percent. Most analysts believe the Fed will raise the federal funds rate — what banks charge each other for short-term loans — for the second time this year. Minneapolis Fed President Neel Kashkari dissented in Wednesday's decision.

Traders work at their desks in front of the German share price index, DAX board, at the stock exchange in Frankfurt, Germany, July 1, 2016.

Upon the announcement of the increase, Fed Chair Janet Yellen said: "Our decision... reflects the progress the economy has made and is expected to make". Stocks on Wall Streets hit a record high overnight.

Other reports by Click Lancashire

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