(Reuters) -

The seal for the Board of Governors of the Federal Reserve System is displayed in Washington, U.S., June 14, 2017. REUTERS/Joshua Roberts

STORY: 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.

KEY POINTS:

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

The Fed gave a 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.

COMMENTS:

KRISTINA HOOPER, GLOBAL MARKET STRATEGIST AT INVESCO LTD IN NEW YORK

“This is what I expected – that the Fed would be in something of a hurry to get out plans for balance sheet normalization in advance of any changes in FOMC membership, but that we likely won’t see the start of implementation until the fourth quarter. And as I expected, the Fed will be slowly and carefully normalizing. What’s perhaps most noteworthy is that the Fed has taken its data dependent monetary policy with regards to the fed funds rate and extended it to balance sheet normalization – note the sentence in the Addendum to the Policy Normalization Principles and Plans:

MICHAEL PURVES, CHIEF GLOBAL STRATEGIST AT WEEDEN & CO IN NEW YORK

“When you look at the Fed statement and you think about how the recent data has been trending and you think about the market reaction, the core question is does the Fed really change their narrative aggressively. Not today so much but do we start seeing a much more dovish narrative going forward? Because it’s going to be really hard to defend some of the things that they have put in this statement, if in fact the data doesn’t start getting better soon.

“A couple of weeks ago (Fed Governor) Lael Brainard gave a speech that was very much of the view that we are not seeing the inflation necessary to really talk seriously about a balance sheet reduction any time soon. That, sort of more fringe narrative, is going to go mainstream.

JOE MANIMBO, SENIOR MARKET ANALYST, WESTERN UNION BUSINESS SOLUTIONS, WASHINGTON

“The U.S. dollar cut session losses after the Fed raised rates... and signaled another rate increase before the end of the year. Ahead of the Fed’s decision, the broadly weighted U.S. dollar index had fallen to fresh lows for the year after disappointing news on the U.S. economy cast doubt on further rate increases. While the Fed noted the recent slowing in inflation that was evident in today’s consumer price index, the bank’s forecasts for the economy maintained confidence in its underlying strength. The Fed revised up slightly its forecasts for growth this year while it nudged down its predictions for unemployment and inflation. The Fed chair’s comments at the bottom of the hour are also likely to impact currencies. The Fed’s glass half full assessment of the U.S. economy should support the dollar. But if the Fed’s view should prove overly optimistic the dollar would be at risk of deepening its recent losses.”

HEIDI LEARNER, CHIEF ECONOMIST, NEW YORK, SAVILLS STUDLEY, SAVILLS PLC

“The market should take confidence in the fact that they’re being very transparent in setting clear policy steps in terms of how they normalize the balance sheet. Certainly more transparency is a good thing.

“After this morning’s dip in CPI to 1.7 percent from 2.3 percent year on year at the beginning of the year, it would be hard for them not to adjust that down, the same thing about their changes to the unemployment rate, the dip down for 2018, 2019 has to reflect the fact we’re already at 4.3 percent.

“I would have liked to see some mention about the extent to which they’re concerned about the decline in inflation. That’s probably behind Kashkari’s dissent in terms in wanting to keep rates where they were, but they didn’t seem terribly worried.

“If you look at the fact that now we’ve had two rate hikes this year, you could argue we’ve gone from 2.6 percent in 10-year Treasuries, now down to almost 2.10 percent, so that 50 basis points increase we’ve had in Fed Funds has been equal to the decline in 10-year Treasury yields. So clearly the flattening of the yield curve here suggests maybe not as much growth or not as much tightening as would have been the case.

BRETT RYAN, SENIOR U.S. ECONOMIST, DEUTSCHE BANK, NEW YORK:

“The fact that they kept the interest rate trajectory the same is not surprising. Despite the weak inflation prints recently they are not reexamining or rethinking the path of rates just yet. We did get more details than expected on reinvestment tapering but they were in line with what we were expecting.

“They upgraded their level of concern about inflation by stating that the committee is monitoring the inflation “closely.” To the backdrop, they lowered inflation forecasts in the summer of economic projections by 0.3 pct in the headline and 0.2 percent in the core. That sets a low bar to get to their forecast target by year-end. As long as your core PCE is on track to hit 1.7 percent, market participants should expect another rate hike by the end of this year.

“In terms of our forecast, nothing really has changed. We still think in September they take a pause. They announce implementation of taper. They could hike at that time, but we think they probably pause then and then hike in December assuming things go well.

“They did a good job communicating.

“The market is still underpricing 2018 and 2019 well below where the Fed thinks things are going to be in terms of rates.

MARK CABANA, HEAD OF U.S. SHORT RATES STRATEGY AT BANK OF AMERICA MERRILL LYNCH IN NEW YORK:

“I don’t think that there is really too much new in here outside of the fact that the Fed remains committed to the slow gradual normalization process despite some of the weak data that we’ve had. It just looks like the Fed is sticking to their story and the market remains highly skeptical that the Fed is going to be able to deliver just based upon underlying data. I would think that at some point the market is going to be pricing in even greater risks that the Fed might be moving too quickly, and we’ve certainly seen some of that price action over recent days with yields falling and inflation breakevens moving lower, but for now it seems like the Fed is pretty committed to stay on their path.”

DAN IVASCYN, GROUP CHIEF INVESTMENT OFFICER AT PACIFIC INVESTMENT MANAGEMENT CO, NEWPORT BEACH, CALIF:

“The statement was slightly on the hawkish side. I think it’s just how Central Banks speak. I think that, more important, arguably today was the weakness of the retail and inflation data. As our economist pointed out, there’s a trend and signs of weakening in the harder data. There’s some pressure on inflation and we think the Fed is going to take note of this weaker data. The reality is that they are going to be data-dependent and we remain cautious on interest-rate risk, but we’re not massively selling bonds here. Be careful not to be bearish on this statement.”

BILL NORTHEY, SENIOR VICE PRESIDENT, US BANK WEALTH MANAGEMENT, HELENA, MONTANA

“The muted market reaction thus far I think that’s what is standing out to me.

“Notably as I’m looking down through the adjustments that were made … the PCE inflation expectations for 2017 have been materially ratcheted down from 1.9 to 1.6 percent. That’s notable because that indicates that the Fed is viewing that there’s less inflation in the system and would look at this as a relatively dovish hike.”

“To the extent that this is viewed as a materially dovish hike we could see a little bit more weakness in the dollar.”

“When you’re looking at lower levels of inflation and potentially a Fed that may have to take a somewhat slower path toward policy rate normalization that could allow rates to stay lower for a longer period of time across the Treasury curve and continue to provide more accommodation, things that have been positive from an equity markets perspective. Certainly valuations across the equity market complex are full at this time and aided by low interest rates and low inflation.”

KULLY SAMRA, UK MANAGING DIRECTOR AT CHARLES SCHWAB, SAID:

“An interest rate rise today was highly expected and shows the Fed continues to be confident in moving toward normalizing monetary policy. Despite recent underwhelming jobs numbers, the underlying US economic data remains robust enough to warrant tightening.

“While the economy is bouncing back from a weak first quarter, earnings have been strong and even in the wake of continued political uncertainty, corporate confidence remains secure. The market has demonstrated that it is comfortable with gradual rate hikes and will be reassured that the Fed has today committed to its promises. We expect at least one more rate hike this year but incoming data will influence future decisions.”

“The next step for the Fed will be to reduce its balance sheet and stocks could experience bouts of volatility in the coming months due to both political surprises and Fed policy communications. The bull market still has legs, but investors should be aware that risks are elevated.”

BRENT SCHUTTE, CHIEF INVESTMENT STRATEGIST AT NORTHWESTERN MUTUAL WEALTH MANAGEMENT IN MILWAUKEE, WISCONSIN

“This one was priced in by the market and even with the weaker inflation data today everyone still expected the Fed to hike rates because the market had given them the green light to do so. There is a lot of information also to digest in this one with the balance sheet reduction and some slight tweaks to the language. But in general the underlying economic backdrop, in my mind, supports what they did today. The funny thing is the retail sales data was actually decent. Everybody forgets to look at the revisions and if you look at the revisions for the last two months they were actually up quite a bit. So you have retail sales which actually now are additive to second-quarter GDP.

“Everybody is fixated on the inflation data and it is a little bit of a mystery. But in general you are at this point in the economic cycle where unemployment is, where qualified workers are hard to find. The textbook says that inflation should rise, the question is if this time is different. We still believe supply and demand works and because there is not much supply of labor and a ton of demand, wages will rise and the way companies will pay for those wages is through rising prices which will translate to rising inflation in the future.”

RICH TAYLOR, PORTFOLIO MANAGER AT AMERICAN CENTURY INVESTMENTS IN MOUNTAIN VIEW CALIFORNIA

“The big takeaways were as expected. What is noteworthy is that today Yellen laid out the balance sheet reduction plan with a lot more detail.”

“Obviously with the big drop off in inflation this morning, which was a bit of a surprise, and the recent softening of economic data in general, it certainly gave the Fed pause with regards to September.”

“The market’s not reacting much because the 25 basis point increase was widely expected.”

“In the bond market we’re still range bound. For investors it’s still a yield grab in the credit markets even though the credit markets are very expensive. Bond investors don’t have to worry about significantly higher rates for quite a while.”

“There’s too many headwinds on the economic and geopolitical front to take up interest rates out of the recent range any time soon.”

“We still think there’s one more 25 basis point move, obviously data dependent but it might not happen until December if we continue to get soft inflation data.”

BRIAN JACOBSEN, CHIEF PORTFOLIO STRATEGIST AT WELLS FARGO FUNDS MANAGEMENT IN MENOMONEE FALLS, WISCONSIN

“The FOMC met expectations and delivered a dovish hike. It’s dovish in that they acknowledge the data has softened and they haven’t dismissed the weaker inflation readings as being merely transitory. While the base case can be for another rate hike this year, it’s not unthinkable that they could just pause until September or even December to get the “coast is clear” signal on inflation.

“The balance sheet reduction plan is so mild and mechanical that it shouldn’t be an issue for the longer-dated Treasury or MBS markets. They stormed into the room with QE and are tiptoeing out almost unnoticed.”

GENNADIY GOLDBERG, INTEREST RATE STRATEGIST, TD SECURITIES, NEW YORK

“Generally speaking this does seem like a more hawkish statement. The Fed announcing an update to their reinvestment principles leaves September open (for) 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.”

MARKET REACTION:

STOCKS: Stocks moved slightly higher then flattened. The S&P; 500 .SPX was last down 0.2 percent after being down 0.06 percent just before the decision.

BONDS: U.S. Treasury yields briefly fall, then retrace and edge higher.

FOREX: The U.S. dollar index pared earlier losses.</s>The Federal Reserve increased short-term interest rates by a quarter percentage point on Wednesday, and outlined a plan to trim its massive bond holdings amassed to bolster a recession-weakened economy.

The Fed's rate hike, to a 1.0-to-1.25 percent range, comes as the economy gives off mixed growth signals, with gross domestic product expansion at a mere 1.2 percent in the first quarter but unemployment at a low 4.3 percent in May. "The economy will continue to expand," Fed Chairwoman Janet Yellen said at a news conference, adding that job growth was "solid."

Meanwhile, the inflation rate is still below the 2 percent level that the Fed deems necessary for a healthy, growing economy and stable prices. The personal consumption expenditures measure, the Fed's preferred measure, inched up 1.7 percent in April, versus the year before.

The latest action of the Fed's policy-making panel, called the Federal Open Market Committee, marked the fourth increase in a gradual sequence that began in December 2015. The Fed paused after that, as tumult like Britain's vote to exit the European Union, jolted the financial world. It resumed last December with a 0.25% raise and added another 0.25% boost in March.

Will the Federal Reserve raise interest rates in June?

"We're not moving so aggressively as to put a brake on continued improvement in the labor market," Yellen said.

This latest in a series of raises is a reversal of the Fed's action to combat the financial crisis and the Great Recession. In 2007, as the economy worsened, the benchmark federal funds rate was 5.25 percent. The central bank began lowering it to near zero by the end of 2008.

Also as a result of the financial crisis, the Fed also started an unprecedented stimulus program to buy long-term bonds -- Treasuries and mortgage-backed securities -- in a bid to keep down long-term rates, and thus spur business and consumer borrowing and spark economic growth. From asset holdings of $900 billion before the recession, the Fed ended up expanding its balance sheet to $4.5 trillion.

On Wednesday, the Fed indicated that it would decrease the bond holdings eventually by $50 billion per month, or $600 billion per year. That should help long-trim bond yields to rise. But the process will be gradual, and take "years" to accomplish, she said, adding "like watching paint dry."

Exactly when the next rate increase will be is a matter of conjecture. But the Fed indicated it likely would increase short-term rates one more time this year, and three times in 2018.

All along, Yellen has made a point of wanting to assess how the economy was behaving before moving again. "They don't want to be in any hurry," said Jason Browne, chief investment officer of FundX Investment Group. Many investors recall how the Fed in 1994, fearing inflation, quickly doubled rates to 6 percent, which slammed the bond market.

In that spirit, the Fed also wants to unload its bond holdings gradually, so not to disrupt the markets. "They're going to tiptoe into it until they can normalize things," said Jim Brilliant, portfolio manager of the CM Advisors Fixed Income (CMFIX).

Low rates have been a tonic for the stock market, because they spur investors to buy shares in hopes of gaining better returns than they'd get from fixed-income assets. When the Fed announced it wanted to wind down its bond purchasing in 2013, raising the prospect of higher bond yields, stocks sank. Lately, however, stock investors have gotten used to the notion of increasing rates.

Since the last Fed bond buy in late 2014, the S&P 500 has gained 10.2 percent on an annual basis, said Allen Bond, co-portfolio manager of the Jensen Quality Growth Fund (JENSX). And since the first rate increase of this cycle, in December 2015, the S&P rose 13.4 percent annualized. As Bond explained, the "waning Fed support forced investors to judge stocks by their fundamental and valuation characteristics."</s>"In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-1/4 percent," the statement said.</s>The rate decision of the Federal Reserve is shown on a television on the floor of the New York Stock Exchange, Wednesday. The Federal Reserve is hiking a key interest rate for the second time this year and is planning to reduce the size of its $4.5 trillion balance sheet as well. Fed officials voted 8-1 to raise the federal funds rate to a range of 1 to 1.25 percent. (AP Photo/Richard Drew)</s>WASHINGTON—The Federal Reserve has raised its benchmark interest rate for the third time in six months, providing its latest vote of confidence in a slow-growing but durable economy. The Fed also announced plans to start gradually paring its bond holdings later this year, which could cause long-term rates to rise.The increase in the short-term rate by a quarter-point to a still-low range of 1 per cent to 1.25 per cent could lead to higher borrowing costs for consumers and businesses and slightly better returns for savers.The central bank chose to raise rates again despite an economic slowdown at the start of 2017, which it predicts will prove temporary. It foresees one additional rate hike this year, unchanged from its previous forecast. It gave no hint of when that might occur.Read more:U.S. Federal Reserve hikes interest rate for second time in 3 monthsArticle Continued BelowToronto, New York markets see modest losses as U.S. Fed releases meeting minutesNorth American markets rally as U.S. Federal Reserve hikes interest ratesThe latest Fed rate hike, announced in a statement after a policy meeting, comes as the U.S. economy is growing only sluggishly. Even so, many of the barometers the Fed monitors most closely have given it the confidence to keep gradually lifting still-low borrowing rates toward their historic norms.</s>The Federal Reserve is likely to raise short-term interest rates by a quarter percentage point after its two-day policy meeting concludes Wednesday, the fourth such increase since December 2015. Officials also will release new projections for the economy and interest rates, and could announce their plan for shrinking the Fed’s portfolio of Treasury and mortgage bonds. The central bank will release a statement and the forecasts at 2...</s>Federal Reserve(WASHINGTON) — The Federal Reserve raised its benchmark interest rate again on Thursday, marking the third hike in six months.

The rate was boosted by a quarter of a point to 1.25 percent.

Following its meeting Thursday, the Fed did not change its forecast and says it still expects to raise rates one more time this year.

“Overall, we continue to expect that the economy will expand at a moderate pace over the next few years,” Fed chair Janet Yellen said.

That’s in spite of a sluggish economic to start of this year, according to Bankrate.com’s Greg McBride.

“At this point, they keep saying that the economic weakness is transitory, it’s going to pass, and raising interest rates at this meeting is consistent with that,” McBride explained.</s>WASHINGTON (AP) — The Federal Reserve has raised its benchmark interest rate for the third time in six months, providing its latest vote of confidence in a slow-growing but durable economy.

The increase in the short-term rate by a quarter-point to a still-low range of 1 percent to 1.25 percent could lead to higher borrowing costs for consumers and businesses and slightly better returns for savers.

Below is the statement the Fed released Wednesday after its policy meeting ended:

Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined.

Household spending has picked up in recent months, and business fixed investment has continued to expand. On a 12-month basis, inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further.

Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.

This program, which would gradually reduce the Federal Reserve’s securities holdings by decreasing reinvestment of principal payments from those securities, is described in the accompanying addendum to the Committee’s Policy Normalization Principles and Plans.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; and Jerome H. Powell.

Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.</s>US Federal Reserve on Wednesday raised the benchmark interest rates for the fourth time since December 2015 and unveiled plan to start trimming its balance sheet.

“In view of realised and expected labour market conditions and inflation, the (Federal Open Market) Committee decided to raise the target range for the federal funds rate to 1% to 1.25%,” Xinhua quoted Fed as saying after concluding its two-day monetary policy meeting.

The central bank acknowledged the continuous progress in labour market while expressed their concerns over weak inflation.

Fed officials lowered their forecast for unemployment rate for 2017 down to 4.3%, compared to 4.5% projection made in March, while their forecast for inflation rate in 2017 was revised down to 1.6% from their forecast of 1.9% in March.</s>WASHINGTON—The Federal Reserve said it would raise short-term interest rates and spelled out in greater detail its plans to start slowly shrinking its $4.5 trillion portfolio of bonds and other assets this year.

Fed officials said they would increase their benchmark federal-funds rate on Thursday by a quarter percentage point to a range between 1% and 1.25% and penciled in one more increase later this year if the economy performs in...
The U.S. Federal Reserve raises the federal funds rate by a quarter percentage point to a level between the 1.0-to-1.25 percent range, and outlines a plan to trim its bond holdings and other securities. This is the fourth increase since December 2015.