The US Fed has raised its official rate for a second time, one year after its last rise in December 2015. The Fed’s interest rate setting committee, known as the Federal Open Markets Committee (FOMC) raised the Federal Funds target rate from its 0.25% to 0.50% range to a range of 0.50% to 0.75%.
US bond markets reacted severely. US 2 year bond yields finished 11bps higher at 1.27% and 10 year bond yields finished 10bps higher at 2.57%, while the greenback soared. Australian bonds followed suit when the market opened next morning; yields on 3 year bonds rose 9bps to 2.02% and 10 year bonds rose 8bps to 2.91%.
The decision itself was widely anticipated but what was not expected was the hardening of language regarding inflation and the reversal of the downward trend of FOMC members’ expectations for where the official rate is likely to be in coming years. For the first time in some years FOMC members’ interest rate projections have increased, the language regarding inflation was noticeably stronger and eleven of seventeen FOMC member now expect three rate increases next year. Westpac’s Chris Elliott said, “For inflation, the tone was a little stronger; “Inflation has increased” replaced “inflation has increased somewhat”, while inflation expectations are now seen as having risen “considerably” despite “still” being low.” He also noted how inflation expectations, an important factor for central banks had changed since the US presidential election. “The change in market inflation expectations is entirely due to the anticipated impact of Trump’s mooted policies.”