Economy Watch: Fed Sure of Economy, Raises Rates, Promises Asset Sell-Off

Economy Watch: Fed Sure of Economy, Raises Rates, Promises Asset Sell-Off

The 2-year Treasury note TMUBMUSD02Y, +2.14% -the most sensitive to interest-rate moves-rose 1.3 basis point to 1.356%, compared with 1.343% in the previous session, while the 30-year Treasury TMUBMUSD30Y, +0.54% known as the long bond, edged up 0.6 basis point at 2.789%, compared with 2.783% late Wednesday.

In her press conference after the announcement, Fed Chair Janet Yellen asserted that US economic growth appears to have rebounded enough to justify both higher rates and a return of Fed-held assets to the wider market.

In a separate report, the department announced that US import prices declined 0.3 percent in May after increasing 0.2 percent in April, while the price index for USA exports declined 0.7 percent in May following a 0.2-percent advance in April. Capacity utilization for the industrial sector edged down 0.1 percentage point in May to 76.6 percent, a rate that is 3.3 percentage points below its long-run (1972-2016) average.

Treasury bonds and mortgage-backed securities represent about $4.23 trillion, of which most were purchased in the wake of the 2007-2009 financial crisis and recession.

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.

Federal Reserve chair Janet Yellen said the rate increase reflected the “progress the economy has made and is expected to make towards the maximum employment and price stability objectives assigned to us by law”. If implemented, this means up to $300 billion in balance sheet reduction in the first 12 months and up to $600 billion a year thereafter. The basic idea will be that the Fed will stop reinvesting the principal of securities when they mature. For more information about the Fed’s balance sheet, please read Inside the Fed’s Balance Sheet (The Biggest in the World).

USA economic data, however, was supportive of bond prices.

On Wednesday U.S. stocks closed mixed, with the Dow refreshing its closing record, as Wall Street assessed the Fed’s rate hike decision.

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The surprise helped to strengthen the dollar at the expense of the euro.

After a rally to the $1,265 area, gold came under renewed selling pressure in Europe on Thursday as the dollar gained fresh support against major currencies with EUR/USD sliding to the 1.1150 area. As far as interest rates are concerned, the median forecast was for one further rate increase by the end of 2017. They are just catching up with reality: The jobless rate has dropped with unexpected speed — to a 16-year-low 4.3 percent in May.