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Fed Raises Interest Rates For Second Time In 2017


The Fed hiked interest rates for the second time this year, in a widely expected move that reflects the central bank's confidence in the U.S. economy.

At the conclusion of their two-day meeting on Wednesday, the Federal Reserve’s Open Market Committee raised their benchmark interest rate by 25 basis points to a range of 1% to 1.25%.

The move was essentially a foregone conclusion and the market was pricing in a 99% chance of a rate hike, according to CME Group's FedWatch tool. The decision was supported by everyone on the Fed's committee except Neel Kashkari, who wanted to leave rates unchanged.

In explaining the decision, the Fed said in a statement that "job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined." It described economic activity that has "been rising moderately so far this year."

Stocks were largely unchanged on Wednesday afternoon after the decision, while the yield on the 10-year Treasury fell to 2.11%.

Investors were more curious about the central bank's plans for the rest of the year. It stuck to its forecast of three rate hikes in 2017, which would mean just one more before the year is over. The central bank also outlined its plans to scale back its $4.5 trillion balance sheet, which is loaded with government bonds, mortgage-backed securities and other assets it picked up in the wake of the financial crisis.

In its statement, the Fed said that it "currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated."

The Fed's plan is to gradually reinvest less of the money it's making from its portfolio. The Fed has said it will start by allowing $6 billion in Treasury securities and $4 billion in mortgage-backed securities to mature every month. Eventually its limit will climb to $30 billion in Treasury's a month and $20 billion in mortgage securities.

Fed chair Janet Yellen emphasized that the Fed's "primary" means of monetary policy is to tinker with rates and that she hopes "this is something that will just run quietly in the background over a number of years." She joked that her colleague Patrick Harker, the president of the Philadelphia Fed, described the process as something akin to "watching paint dry."

In any case, Fed watchers don't think the central bank is likely to make any sudden movements. "We expect the Fed to move cautiously in its unwinding process -- akin go crossing a river by feeling the stones," wrote BlackRock's chief fixed income strategist Jeffrey Rosenberg. "Any lack of clarity over the pace and final destination of the Fed's balance sheet unwinding has the potential to unnerve markets."

As rates continue to trend upwards, savers will start to earn a little more for keeping their money in the bank. Meanwhile, carrying a balance on credit cards and taking out loans will get more expensive. The rate on a 30-year mortgage, for instance, has floated higher but is still at a historical low at 3.9%.

One of the main things the Fed keeps an eye on is inflation, which has softened a bit and continues to lag behind their stated goal of 2%. That has the potential to hold the Fed back. "Boosting U.S. inflation isn’t easy," wrote JPMorgan Funds chief global strategist David Kelly in a note to clients. "The question for investors is whether the Fed will also hold monetary policy hostage to low inflation."

The Fed admitted that inflation is likely to remain "somewhat below" its target in the near term and that it will continue to monitor it closely.

"The Fed has been pointing to inflation as a catalyst for future rate hikes and yet it continues to underwhelm," said Scott Kimball, portfolio manager of the BMO TCH Core Plus Bond Fund, in an interview.


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