Fri, Jun 16, 2017 - Page 10 News List

US Fed raises a key rate, signals third hike later


US Federal Reserve Chair Janet Yellen speaks at a news conference in Washington on Wednesday.

Photo: Reuters

The US Federal Reserve on Wednesday raised its benchmark interest rate by a quarter-point to 1 to 1.25 percent and said that another increase remains likely this year, despite the recent spate of weak economic data.

In explaining the second rate hike of this year and plans for more increases in the coming months, Federal Reserve Chair Janet Yellen said the move reflected progress in the world’s largest economy, which continues to add jobs at a solid pace.

“The economy is doing well, is showing resilience,” Yellen said at a quarterly news conference. “We have a very strong labor market, an unemployment rate that’s declined to levels we have not seen since 2001 and even with some moderation in the pace of job growth, we have a labor market that continues to strengthen.”

Despite recent tepid price pressures, the Fed expects inflation to pick up — eventually — citing “one-off reductions” in certain categories such as cellphone services and prescription drugs as the reason for the recent lower readings.

Those factors mean the Fed’s preferred inflation measure will remain below the 2 percent target for some time, but will gradually rise to the target level over “the medium term.”

Analysts in recent weeks have become increasingly doubtful there would be a third rate increase later this year, as inflation, consumption and other economic data have indicated the weakness seen in the first quarter has continued.

Fed futures markets now put the chances for another rate increase this year at below 50 percent.

However, Yellen said business and household confidence remain quite strong, and echoed the statement from the Fed’s policysetting Federal Open Market Committee, which repeated its confidence that the US economy would continue to expand “at a moderate pace” even with further gradual rate increases.

Yellen once again said the path of interest rates “is not a preset course,” but the Fed’s quarterly projections show that it still anticipates making a third rate increase this year, with the median federal funds rate ending this year at 1.4 percent.

That would be followed by three rate increases next year and three more in 2019, with the key rate at 2.9 percent by the end of that period.

The central bank also confirmed that later this year it would begin to implement a plan to reduce the size of its investment holdings, which were built up to record levels during the financial crisis to help support the economy, especially once interest rates reached zero.

As long as the economy “evolves broadly as expected,” the plan “would gradually reduce the Federal Reserve’s securities holdings,” the committee statement said.

Meanwhile, Hong Kong’s de facto central bank followed the Fed and boosted interest rates for a third time since December last year, elevating the risk of a sell-off in the world’s priciest housing market.

The Hong Kong Monetary Authority (HKMA) boosted borrowing costs by 25 basis points to 1.5 percent after the Fed raised its target range by the same amount.

The move registered swiftly in markets, with the territory’s one-month interbank rate, known as HIBOR, jumping the most in six months, and a gauge of property stocks in Hong Kong retreating more than 1 percent.

While the territory effectively imports US monetary policy due to its currency peg, local banks have been reluctant to pass on higher rates to customers amid fierce competition for mortgages — heightening a property boom, as well as fueling depreciation in the Hong Kong dollar.

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