The FED lifted interest rate to a range of 1.00-1.25% for the second time in three months, appreciating the lasting pickup of the US economy and the robust labour market conditions. The policymakers also decided to shrink the balance sheet including bonds and other securities.
The decision to raise the rate matched with the majority of market bets while updates on QE extend the field for play for the greenback, US stocks and fixed-income market. Anticipations of the third-rate hike remained unchanged, as the economy is on planned track, according to the Fed.
In a statement released after the two-day meeting, the regulator said that the economy is expanding at a moderate pace, the labour market continues to strengthen, and the recent inflation weakening was temporary. The statement language indicates the balance sheet arrived at its limit and its necessary to start selling treasuries, bonds and MBS of $4.2 trillion size. Most of them were accumulated during bailout in the midst of the financial crisis and the recession of 2007-2009.
According to the statement, the regulator intends to stop spending income from securities with expiring maturity to replenish the sheet, known as reinvestment policy. Fed’s head Janet Yellen hasn’t indicated the timeframe for tapering off saying it may start soon “enough”.
The meeting helped greenback to rebound; Dollar index grew 0.38% to 97.20 as the concerns eased over consumer inflation lagging labour market strengthening. The estimate of recent inflation slacks as “temporary” points to the more confident stance of the regulator than it was previously thought. The announcement of balance sheet clearing is also a bullish signal for Dollar as the Fed’s faith instability of the US economy has strengthened.
The outlook for accelerating the pace of tightening dampened investment appeal of Gold and precious and base metals. The bullion plunged more than 1% while Yen strengthened amid improving economic conditions in Japan and risk concerns stoked by a surge in market volatility. Pound attempts to resist the headwinds although weaker-than-expected retail sales data and soft stance of BoE intensify pressure on the currency. The Central Bank of UK left the interest rate untouched, confessing defeat by accelerating inflation attempting to maintain easing during political and economic hardships faced by the country. Crude oil plummeted quarter of percent as US commercial crude oil reserves shrunk less than expected, according to the EIA data, worsening outlook for market rebalance.
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