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Text of the Fed's statement after its meeting Wednesday

15 June, 2017, 01:51 | Author: Paula Vaughn

US retail sales in May recorded their biggest drop in 16 months and consumer prices unexpectedly fell month over month, suggesting inflation pressures are moderating, which could impact further Federal Reserve interest rate increases this year. Private economists had expected the move given the labor market's recent performance.

"With financial conditions remaining supportive. and United States financials breaking higher, the Fed may see little reason to moderate its rate hike projections when meeting today", strategists at Morgan Stanley said in a note to clients. In the longer run, policy makers see the jobless rate at 4.6%, down slightly from 4.7% in March. Bond prices fall as yield rise.

The Federal Reserve raised short-term interest rates another quarter percentage point today. The price index for "core" personal consumption expenditures (an index excluding volatile food and energy prices which is useful for assessing the economy's inflationary momentum) has not been above the Fed's 2 percent target since early 2012, and has not been above it on a sustained basis in a decade.

Fed policymakers also released their latest set of quarterly economic forecasts, which showed only temporary concern about inflation and continued confidence about economic growth in the coming years. However, the lack of strong wage inflation is also another sign for the doves that the Fed should not be eager to raise rates.

The last major disconnect between markets and the Fed began in early 2016, just after the Fed's first rate hike of the cycle in December 2015.

The Fed slashed interest rates to 0% in December 2008 to aid the faltering housing market and economy.

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The decision, widely expected by financial markets, took the USA central bank's main rate to a target range of 1% to 1.25% and represented its fourth upwards move since December 2015 when it declared the financial crisis hangover at an end.

The statement said: "The committee now expects to begin implementing a balance sheet normalisation programme this year, provided that the economy evolves broadly as anticipated". Those forecasts are far below the 3 percent annual growth the Trump administration has said it can achieve with tax cuts, deregulation and tougher enforcement of trade rules to protect American jobs.

But the Fed's forecasts are only predictions and are frequently revised as its assessments evolve.

Yellen indicated the Fed still remained confident inflation would rise to its target over the medium term, bolstered by what she described as a robust labour market that is continuing to strengthen.

Economic activity has "been rising moderately so far this year", household spending has "picked up" and and hiring remains "solid", the Fed said.

At the same time, the US will also publish data on May retail sales, amid expectations for a gain of 0.1% last month, after rising 0.4% in April. Even after their recent skid, technology companies have done much better than the rest of the market in 2017.

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