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Fed tightens interest rates again

June 2017

The Fed raised its key interest rate by 0.25 percentage points to a range of 1% to 1.25%, representing its highest level since 2008. The Fed also intends to begin cutting back its balance sheet later this year. The FOMC’s decision was construed as a signal of confidence in the outlook for the US economy.

  • US equity indices reached new highs at the beginning of the month
  • US banks were boosted by the Fed’s assessment that they have sufficient capital in place to withstand a severe financial shock
  • The IMF downgraded its forecast for US economic growth

In a widely anticipated move, the Federal Reserve (Fed) raised its key interest rate for the third time in six months during June, taking the federal funds rate to a range of 1% to 1.25% and their highest level since 2008. The Fed also intends to begin cutting back its balance sheet this year. The Federal Open Market Committee’s (FOMC’s) decision was construed as a signal of confidence in the US economic outlook; Fed Chair Janet Yellen cited “the progress the economy has made and is expected to make”, and further “gradual” increases in the federal funds rate are considered highly likely.

“Further “gradual” increases in the federal funds rate are considered highly likely”

June, taking the federal funds rate to a range of 1% to 1.25% and their highest level since 2008. The Fed also intends to begin cutting back its balance sheet this year. The Federal Open Market Committee’s (FOMC’s) decision was construed as a signal of confidence in the US economic outlook; Fed Chair Janet Yellen cited “the progress the economy has made and is expected to make”, and further “gradual” increases in the federal funds rate are considered highly likely.

US equity indices reached new highs at the start of the month, boosted by President Trump’s decision to withdraw the US from the Paris climate agreement. Over June as a whole, the Dow Jones Industrial Average Index rose by 1.6%, while the S&P 500 Index climbed by 0.5%. The technology-heavy Nasdaq Index fell by 0.9%.

Sentiment towards the financial sector received a boost from a Federal Reserve (Fed) report that the 34 largest US banks have sufficient capital to withstand a range of severe financial shocks including recession, a crash in property prices, and a rise in unemployment to 10%. Investors welcomed the news, which will allow banks to return value to shareholders via increased dividend payments and share buybacks.

The US economy posted a faster rate of expansion than originally calculated during the first quarter of 2017, growing at an annualised rate of 1.4% compared with an initial estimate of 1.2%. Growth was boosted by stronger contributions from consumer spending and exports. During the fourth quarter of 2016, the economy expanded by 2.1%. The International Monetary Fund (IMF) downgraded its forecasts for US economic growth from 2.3% to 2.1% this year and from 2.5% to 2.1% next year. The IMF appears to be unconvinced that President Trump’s administration will be able to implement the reforms through which it intends to boost the US economy.

Fewer new jobs than expected were created in May. Only 138,000 jobs were added during the month, compared with an average monthly gain of 181,000 over the previous 12 months. The number of new jobs in March and April was also revised down. Nevertheless, the rate of unemployment edged down, falling to 4.3%. Average hourly earnings rose at an annualised rate of 2.5%.


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