USA stocks closed mostly lower on Wednesday after the Federal Reserve raised its key interest rate by a quarter of a percentage point while signaling at least one more rate hike later this year.
A number of Fed officials have spoken of the likelihood of the central bank scaling back its bond holdings which the Fed amassed after the 2008 financial crisis in order to keep long-term interest rates low to support economic growth.
That's the highest the rate has been since 2008, but it's still below the Fed's target of 2 percent for next year.
"The Committee now expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated", said the Fed in the statement.
In lifting its benchmark lending rate by a quarter percentage point to a target range of 1.00 percent to 1.25 percent and forecasting one more hike this year, the Fed seemed to largely brush off a recent run of mixed economic data. Banks will now trade their reserve cash at a 1 to 1.25 percent rate of interest.
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"Our decision to make another gradual reduction in the amount of policy accommodation reflects the progress the economy has made, and is expected to make", Fed Chair Janet Yellen said at a press conference. Although it gave no hint on an additional rate hike this year, watchers foresee a similar move in the latter half of the year, reflecting the Fed's previous forecast.
The Fed's plan to begin paring its balance sheet - "provided that the economy evolves broadly as anticipated" - involves its portfolio of Treasury and mortgage bonds. Those figures would rise in increments over a year until they reached $30 billion a month in Treasurys and $20 billion in mortgage bonds. They continue to expect the economy to grow 2.1 percent next year and 1.9 percent in 2019. Her term ends in February. According to their forecast, there will be one more rate hike this year, and three more next year. By then, the Fed's forecast would put its key policy rate at 3 percent. Unemployment has already reached a 16-year low of 4.3 percent.
"The start of balance sheet runoff and the fact that they haven't slowed their projected path of rate hikes suggest they can do both balance sheet and rate hikes at the same time".
Certainly, the core of the Fed have a glass half-full approach to inflation, but there is no doubt that if the future inflation reads don't turn around, like they expect, then the market is going to pile into USA treasuries and continue offering USD's, notably against emerging market currencies like the MXN and BRL.
President Donald Trump is expected soon to fill three vacancies on the Fed's influential board, and those new members, depending on who they are, could alter its rate-setting policy. By contrast, "doves" favor the direction taken under Yellen, favoring relatively low rates to maximize employment.
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