US Fed­eral Re­serve raises key rate by 0.25%

China Daily (Canada) - - ACROSS AMERICA - By PAUL WELITZKIN in New York paulwelitzkin@chi­nadeai­lyusa. com

As widely ex­pected, the US Fed­eral Re­serve on Wed­nes­day re­sponded to pos­i­tive eco­nomic news and raised its short­term in­ter­est rate by a quar­ter per­cent­age point. The ac­tion is likely to have im­pli­ca­tions for China’s cen­tral bank, the Peo­ple’s Bank of China (PBOC), and on the amount of cap­i­tal leav­ing the main­land, an­a­lysts said.

The in­crease in the Fed’s bench­mark rate to a range be­tween 0.75 per­cent and 1 per­cent comes af­ter it lifted the rate in De­cem­ber by a quar­ter per­cent­age point for just the sec­ond time in the past decade. In a state­ment, the Fed said the econ­omy was ex­pand­ing at a “mod­er­ate pace” and that it was now fo­cused on sta­bi­liz­ing in­fla­tion.

The Fed ac­tion fol­lows strong job growth in Jan­uary and Fe­bru­ary, healthy con­sumer spend­ing and the so-called Trump ef­fect. The stock mar­ket has been ral­ly­ing since the elec­tion of Don­ald Trump on an­tic­i­pa­tion of tax cuts, in­fra­struc­ture spend­ing and reg­u­la­tory re­lief even though un­cer­tainty sur­rounds much of the new pres­i­dent’s pro­pos­als.

An­other fac­tor is the state of the global econ­omy. An­a­lysts said fears of a se­vere slow­down in China have largely dis­ap­peared while growth in Europe is show­ing signs of a re­bound.

The in­crease means con­sumers and busi­nesses will pay slightly higher in­ter­est rates on loans, credit cards and mort­gages. Savers are un­likely to ben­e­fit im­me­di­ately be­cause banks tend to raise in­ter­est rates on loans more quickly than on de­posits.

Sung Won Sohn, a pro­fes­sor of eco­nom­ics at Cal­i­for­nia State Uni­ver­sity Chan­nel Is­lands in Ca­mar­illo, Cal­i­for­nia, said in an email the move will af­fect the yuan and the con­duct of mon­e­tary pol­icy by the PBOC.

“The mar­ket has fac­tored in the hike al­ready. The lat­est in­crease will re­in­force the sen­ti­ment in the mar­ket that the Fed­eral Re­serve is very se­ri­ous about com­bat­ing fu­ture in­fla­tion and off­set­ting some of the fis­cal stim­u­lus com­ing from the Trump ad­min­is­tra­tion,” he said. “In short, the tra­jec­tory of the in­ter­est rate is ex­pected to be more fre­quent and steeper.”

China’s cen­tral bank chief Zhou Xiaochuan said re­cently that the Chi­nese cur­rency, the yuan, will sta­bi­lize this year amid a firm­ing econ­omy and global con­fi­dence in the coun­try’s growth prospects. He also re­it­er­ated that the fall in China’s for­eign ex­change re­serve is a nor­mal oc­cur­rence.

China re­duced its hold­ing of US Treasury se­cu­ri­ties in Jan­uary af­ter adding $9.1 bil­lion the pre­vi­ous month, the lat­est data from the US Treasury Depart­ment showed on Wed­nes­day. China re­duced its hold­ings of Trea­surys by $7.3 bil­lion in Jan­uary, with to­tal hold­ings down to $1.05 tril­lion.

On Wed­nes­day, Fed mem­bers pro­jected that they will raise rates two more times in 2017, though it all de­pends on how the econ­omy per­forms. The Fed had raised rates only one time each in 2015 and 2016.

Xin­hua con­trib­uted to this story.

MIKE BLAKE / REUTERS

Two boys sit with their lunch on a bean­bag chair in the newly built Cinepo­lis theater for chil­dren and fam­i­lies in Pico Rivera, Cal­i­for­nia, on Wed­nes­day.

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