Fed hikes US interest rate by 0.25%

THE US Federal Reserve raised interest rates yesterday for the second time in three months, citing continued economic growth and job market strength.

It also announced that it would begin cutting its holdings of bonds and other securities this year.

The decision lifted the US central bank’s benchmark lending rate by a quarter percentage point to a target range of 1 percent to 1.25 percent 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 labour market continued to strengthen and a recent softening in inflation was seen as transitory.

The Fed gave a clear outline on its plan to reduce its $4.2 trillion (R52.9 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 balancesheet normalisation programme this year, provided the economy evolves broadly as anticipated,” the Fed said. According to an addendum released with the policy statement, the Fed anticipates that the balance-sheet reduction plan would feature halting reinvestments of ever-larger amounts of maturing securities.

The Fed sees the cap for Treasury securities to be $6 billion per month initially, increasing in $6bn increments at threemonth intervals over 12 months until it reaches $30bn per month.

For agency debt and mortgage-backed securities, the cap will be $4bn per month initially, increasing by $4bn at quarterly intervals over a year until it reaches $20bn per month. The Fed has now raised rates four times as part of a normalisation of monetary policy that began in December 2015. The central bank had pushed rates to near zero in response to the financial crisis.

Policymakers forecast growth of 2.2 percent for 2017. – Reuters