US Federal Reserve raises interest rates by further 0.25%

Its latest forecasts indicate one more rate hike in 2017 and a further three in 2018

Fed chair Janet Yellen (Getty Images)

The US central bank, as widely expected, voted Wednesday to raise interest rates by another quarter point to between 1 and 1.25 per cent.

"The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate," the Fed's rate-setting committee said in a statement.

Its latest forecasts indicate one more rate hike in 2017 and a further three in 2018.

The Fed, chaired by Janet Yellen, also said it was preparing to start reducing its $4,500bn balance sheet later in 2017, although it didn't give a specific date.

“The committee currently expects to begin implementing a balance sheet normalisation program this year, provided that the economy evolves broadly as anticipated," it said.

It will gradually roll off a fixed amount of assets each month, with the initial cap set at $10bn a month. This will comprise $6bn of Treasury bonds and $4bn of mortgage-backed securities.

The caps will increase every three months by $6bn for Treasuries and $4bn for other securities until they reach $30bn and $20bn, respectively.

"Helpfully, the [Fed] is now debating whether to start reducing the [Quantitative Easing] stock later this year. This is the logical next tightening step, but is the gentlest possible form of [Quantitative Tightening]," said Neil Williams, economist at Hermes Investment Managaement.

Earlier on Wednesday, the US Labor Department reported that core inflation dipped to just 1.7 per cent in May, the weakest since May 2015.

Retail sales fell 0.3 per cent in the month, indicating a cooling economy and sending US Treasury yields down sharply.

The Fed has a mandate to target an annual inflation rate of 2 per cent.

In March the Federal Reserve raised interest rates 0.25 percentage points to 0.75-1 per cent.

This followed a rise in December 2016 to 0.5-0.75 per cent.

One of the nine voting members of the Fed board, Neel Kashkari of Minneapolis, voted against raising rates.

Some analysts noted that the US economy was unlikely to benefit from the early tax cuts and spending increases previously expected from the Trump administration and the Republican-controlled Congress.

"With little sign of tax reform and fiscal stimulus on the horizon and inflation rates declining rather than rising, markets will remain sceptical on the Fed’s assessment of the likely path of interest rates. We are still predicting an interest rate rise in September, but this will require further evidence that labour market tightness is generating higher wage growth," said James Knightley of ING.