Fed Raises Rates; Cuts Bond Holdings

June 14, 2017

Washington (Reuters) – The Federal Reserve raised interest rates on Wednesday for the second time in three months, citing continued U.S. economic growth and job market strength, and announced it would begin cutting its holdings of bonds and other securities this year.

The decision lifted the U.S. Central Bank's benchmark lending rate by a quarter percentage point to a target range of 1.00% to 1.25% as it proceeds with its first tightening cycle in more than a decade.

In its statement following a two-day meeting, the Fed's policy-setting committee indicated the economy had been expanding moderately, the labor market continued to strengthen and a recent softening in inflation was seen as transitory.

‘Balance Sheet Normalization’

The Fed also gave a first clear outline on its plan to reduce its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, most of which were purchased in the wake of the 2007-2009 financial crisis and recession.

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

The central bank said it would gradually ramp up the pace of its balance sheet reduction, and anticipates the plan would feature halting reinvestments of ever-larger amounts of maturing securities.

The Fed said the initial cap for Treasuries would be set at $6 billion per month initially and increase by $6 billion every three months over a 12-month period until it reached $30 billion per month in reductions to its holdings.

For agency debt and mortgage-backed securities, the cap will be $4 billion per month initially, increasing by $4 billion at quarterly intervals over a year until it reached $20 billion per month.

Stocks & Dollar Get A Boost

U.S. stocks rose after the Fed announcement, while the dollar reversed some of its earlier losses.

"The Fed announcing an update to their reinvestment principles leaves September open. 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," said Gennadiy Goldberg, interest rate strategist at TD Securities.

 

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