MTS Help Center

·         Fed lifts rates amid stronger inflation, drops crisis-era guidance

The Federal Reserve raised interest rates on Wednesday, a move that was widely expected but still marked a milestone in the U.S. central bank’s shift from policies used to battle the 2007-2009 financial crisis and recession.

In raising its benchmark overnight lending rate a quarter of a percentage point to a range of 1.75 percent to 2 percent, the Fed dropped its pledge to keep rates low enough to stimulate the economy “for some time” and signaled it would tolerate inflation above its 2 percent target at least through 2020.

“The economy is doing very well,” Fed Chairman Jerome Powell said in a press conference after the rate-setting Federal Open Market Committee released its unanimous policy statement after the end of a two-day meeting.

“Most people who want to find jobs are finding them. Unemployment and inflation are low ... The overall outlook for growth remains favorable.”

Policymakers’ fresh economic projections, also issued on Wednesday, indicated a slightly faster pace of rate increases in the coming months, with two additional hikes expected by the end of this year, compared to one previously.

Fed policymakers projected gross domestic product would grow 2.8 percent this year, slightly higher than previously forecast, and dip to 2.4 percent next year, while inflation is seen hitting 2.1 percent this year and remaining there through 2020.

The unemployment rate, currently at an 18-year low of 3.8 percent, is expected to fall to 3.6 percent this year, compared to the 3.8 percent that the Fed projected in March.

 “The labor market has continued to strengthen ... economic activity has been rising at a solid rate,” the Fed said in its statement. “Household spending has picked up while business fixed investment has continued to grow strongly.”

Estimates of longer-run interest rates were unchanged and seen reaching as high as 3.4 percent in 2020 before dropping to 2.9 percent in the longer run.

·         Wall Street’s top banks expect the U.S. Federal Reserve to raise interest rates twice more this year and three times in 2019, in line with forecasts issued Wednesday by central bank policy makers who signaled a modest acceleration to their pace of rate hikes along with increased confidence in the economy.

A Reuters poll on Wednesday found the median expectation among the so-called primary dealers, the 23 large banks authorized to transact directly with the Fed, was for the central bank’s benchmark overnight lending rate to climb to a range of 2.25 percent to 2.50 percent by the end of this year. It will rise to between 3.00 and 3.25 percent at the end of 2019.

·         U.S. producer prices increased more than expected in May, leading to the biggest annual gain in nearly 6-1/2 years, but underlying producer inflation remained moderate.

The Labor Department said on Wednesday its producer price index for final demand rose 0.5 percent last month, boosted by a surge in gasoline prices and continued gains in the cost of services. The PPI edged up 0.1 percent in April.

In the 12 months through May, the PPI increased 3.1 percent, the largest advance since January 2012. Producer prices rose 2.6 percent year-on-year in April. Economists polled by Reuters had forecast the PPI gaining 0.3 percent from the prior month and rising 2.8 percent from a year ago.

A key gauge of underlying producer price pressures that excludes food, energy and trade services nudged up 0.1 percent last month. The so-called core PPI rose by the same margin in April. In the 12 months through May, the core PPI rose 2.6 percent after advancing 2.5 percent in April.

·         The dollar ended steady to modestly higher on Wednesday, hitting a three-week high against the yen, as Federal Reserve officials saw the likelihood of two more interest rate increases for a total of four in 2018 based on a solid economic outlook.

In late trading, the dollar was flat against the yen at 110.50 yen after touching a three-week peak at 110.84 shortly after the release of the Fed’s latest policy statement.

The greenback finished 0.44 percent lower versus the euro at $1.1795.

The dollar index has erased all of its gains so far this week and stood at 93.495 .DXY.

Some traders speculate the ECB may offer clues on its intentions to begin tapering its bond purchases this year at its upcoming meeting, while other traders reckon ECB officials may refrain from signalling changes to its stimulus programme given Italy’s fragile political situation and a recent spate of disappointing data in the euro zone.

·         The European Central Bank will debate on Thursday whether to end its huge asset purchases by year-end, in what would be its biggest step toward dismantling crisis-era stimulus credited with pulling the euro zone economy out of recession.

Meeting as growth is slowing and political populism threatens to set off market turbulence, the ECB is expected to argue that its 2.55 trillion euro ($3.00 trillion) bond-buying scheme has done its job in bringing the 19-member currency bloc back from the brink of collapse.

·         U.S. trade relations appear to be hitting rock bottom ahead of potential new tariffs on China Friday and amid continuing worries that President Donald Trump will shred the North American Free Trade Agreement with Canada and Mexico.

Trump's already testy meeting with leaders of major trade partners at the G-7 summit last weekend took an even more difficult turn when he and administration officials slammed Canadian Prime Minister Justin Trudeau. Trudeau had commented that Canada would not be pushed around by the U.S. and that it would proceed with retaliatory tariffs, drawing criticism from Trump and other officials who said Trudeau was stabbing Trump in the back.

·         U.S. President Donald Trump said on Wednesday that North Korea no longer posed a nuclear threat and his top diplomat offered a hopeful timeline for “major disarmament,” despite skepticism at home that Pyongyang will abandon its nuclear weapons following this week’s summit.

Trump and North Korean leader Kim Jong Un issued a joint statement after their historic meeting in Singapore on Tuesday that reaffirmed the North’s commitment to “work toward complete denuclearization of the Korean Peninsula” and gave U.S. guarantees of security to North Korea.

·         Oil prices turned positive on Wednesday after a bigger-than-expected decline in U.S. crude inventories along with surprise drawdowns in gasoline and distillates indicated strong demand in the world’s top oil consumer.

Earlier in the session, Brent and U.S. crude futures had retreated on concerns about rising production in the United States and expectations that OPEC and other producers could relax voluntary output cuts when they meet on June 22-23 in Vienna.

Brent crude LCOc1 settled up 86 cents, or 1.1 percent, at $76.74 a barrel and U.S. crude CLc1 closed 28 cents, 0.4 percent, higher at $66.64 a barrel.

Reference: Reuters, CNBC