Following its latest policy meeting, the Federal Reserve Open Market Committee (FOMC) increased the target rate for the Federal Funds rate by 0.25% to 1.00-1.25% which was in line with consensus forecasts.
There was an 8-1 vote for the decision with Minneapolis President Kashkari again dissenting and preferring to wait for further evidence.
In the statement following the decision, the Fed stated that the near-term risks to the economy appear roughly balanced, but expects inflation to remain below target at 1.6% in the near term and is monitoring developments closely.
Household spending had picked up and fixed investment has continued to expand.
There was no change in the median view of the Fed Funds rate at the end of 2017 at 1.375% with 8 of the 16 FOMC members seeing one further rate increase while four expect rates to be increased twice during the second half of the year.
As far as the balance sheet is concerned, the Fed expects to implement its balance sheet normalisation plans this year, initially trimming holdings of Treasury securities by $6bn per month and $4bn per month for mortgage-backed securities. The reduction in Treasuries would gradually accelerate until it reaches $30bn per month with mortgage-backed securities rising to $20bn per month.
The statement and rate projections contained no major surprises and were close to expectations, but the low level of inflation is clearly a concern and inflation trends will remain a key focus in the short term.
Ahead of the Federal Reserve policy decision, there was a notable shift in market sentiment following the weaker than expected US CPI and retail sales releases. Weaker than expected data across all major metrics undermined confidence in the growth outlook and cast fresh doubt on the inflation dynamics.
There were fresh doubts surrounding the medium-term outlook which put the dollar under pressure as bond yields fell sharply.
Given the sharp moves ahead of the statement, the dollar regained some ground following the announcement with USD/JPY at 109.20 from 109.05 while Treasuries pared gains slightly, but there was still a daily gain of around 25 ticks.
Markets will monitor Chair Yellen’s press conference for further hints on the likely outlook.