Fed is set to raise rates this week despite political tumult

Dianna Christensen
June 12, 2017

The sharp decline, driven by younger respondents, is the latest hint that a soft patch in USA inflation could expand and slow the Fed's plan to raise interest rates at a pace of about three times per year. Recent Fedspeak has clearly downplayed the subdued first quarter for the US growth and weak inflation prints as temporary and implied that the Fed would continue with its policy plan for the rest of 2017 as full employment has been achieved.

However, they implied traders have not fully priced in the Fed's target range on rates reaching 1.25-1.50 percent until late 2018.

Some economists, however, say the economy can tolerate higher rates, as they remain low by historical standards.

At the policy meeting last month, the central bank left rates unchanged at between 0.75 per cent and 1 per cent, and policymakers said they would wait to see whether evidence supported another rate hike. An half hour later, Fed Chair Janet Yellen is scheduled to appear at a press conference. Prices in fed funds futures contracts imply a roughly 90 per cent probability of a June increase, and then only about even chances for another hike this year.

In May, the last time the board met, they voted unanimously to maintain interest rate paid on required and excess reserve balances at 1.00 percent.

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Speculation on the timing of the Fed's next rate increase after a possible one to be announced in Wednesday comes as traders await more information on the Fed's plan to shrink its $4.5 trillion balance sheet.

One interesting twist is that the May consumer price and retail sales reports will be also be released on Wednesday morning during the Fed's two-day deliberations.

"They seem to be more committed to just getting back to some version of normal than following the numbers", said Mr Jared Bernstein, economic advisor to former vice-president Joe Biden.

The Federal Reserve will increase interest rates twice more in 2017 and begin shrinking its balance sheet before year's end despite a clear downturn in the outlook for inflation, according to 43 economists surveyed by Bloomberg. The central bank showed in the run-up to its March meeting that they "can jawbone quickly" and raise expectations for a tightening, he said.

Other reports by GlobalViralNews

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