Fed raises rates again, find out where will the dollar be heading for the rest of 2017.
Fed chair Janet Yellen and her colleagues raised the federal funds rate from 1% to 1.25% overnight, and reiterated they expect inflation to return to target in a few years. At the same time, they stressed they are watching low inflation numbers “closely” after a series of disappointing readings.
- Question #1: How many more rate hikes for the rest of 2017?
Probably one more in September or December. Fed policymakers point to further rate hikes in the coming years, including another quarter-point hike by the end of 2017.
- Question #2: Did Fed downgrade its inflation outlook?
Not really, at least not now. Yellen acknowledged the weaker inflation readings in recent months, but insisted they were significantly driven by one-off reduction in prices. She said the committee still expects inflation to move up and stabilise at around 2% in the next couple of years.
- Question #3：Did FOMC discuss its plan on shrinking the balance sheet?
Yes, it is the first time in recent FOMC meetings. FOMC will reduce reinvestment of principal payments received on maturing securities in its portfolio. Payments will only be reinvested to the extent they exceed a set of gradually rising caps, according to the statement. For Fed’s holdings of Treasuries, FOMC anticipated the cap will start at $6bn per month, and increase in steps of $6bn at three-month intervals over 12 months until it reaches $30bn a month. For incoming payments on mortgage-backed securities, caps will start at $4bn per month and increase in steps of $4bn at three-month intervals over 12 months until they reach $20bn per month.
- Question #4: What is the market reaction after FOMC and what does it mean?
U.S. dollar strengthening, Treasury yields rising and U.S. stocks edging higher. Such market reaction suggests U.S. economy recovery is sustainable and rates normalisation will continue. However, inflation will be the most important economic data to watch in second half of the year. If inflation picks up, the overnight market reaction will continue; if not, we may see stocks, Treasury yields and U.S. dollar falling.
Fullerton Markets Research Team
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