Wall Street set to open flat as Fed rate decision looms

The market (according to fed funds futures) puts the fed funds rate at around 1.24% by the end of 2017 [Figure 2], close to the Fed's own projection, and just one basis point (0.01%) lower than what the market was predicting immediately after the March rate hike. Private economists had expected the move given the labor market's recent performance.

"What I can tell you is that we anticipate reducing reserve balances and our overall balance sheet to levels appreciably below those seen in recent years but larger than before the financial crisis", Fed chair Janet Yellen says. It foresees one additional rate hike this year, unchanged from its previous forecast. But there are also expectations of tweak in the Fed's outlook to reflect a weaker run of data since the start of the year. Wall Street now only sees around three more rate hikes, including Wednesday's, through the end of 2019 pushing rates to a high of 1.75 percent.

The central bank head addressed perhaps the most vexing issue facing issue facing policymakers, mainly that Fed policies have yet to achieve the 2 percent inflation target its programs were supposed to generate. The Fed's target for inflation is 2 percent.

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The decision was expected after months of hinting. Most analysts believe the Fed will raise the federal funds rate - what banks charge each other for short-term loans - for the second time this year.

"Weaker than expected inflation and retail sales data sent the dollar tumbling, but the Fed's decision to increase the base rate for borrowing should shore things up a little". Only Neel Kashkari, president of the Minneapolis Fed bank, opposed the increase. Shares of Astra International rose 3.98 percent, Bank Rakyat Indonesia (BRI) climbed 2.59 percent, Bank Mandiri surged 2.04 percent, HM Sampoerna rose 1.05 percent, and Gudang Garam climbed 1.71 percent on Wednesday.

"The Fed looks to be positioning for a downturn but if inflation continues to underperform this may well be the last hike of the year".

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The Committee now expects to begin implementing a balance sheet normalisation program this year, provided that the economy evolves broadly as anticipated. Unemployment dipped to 4.3 percent in May, a 16-year low.

U.S. Treasurys spiked Wednesday, with the benchmark 10-year yield sliding to 2.117 percent; it traded near 2.2 percent earlier in the session. It finally raised the rate modestly in December 2015, then waited a year do so again.

"Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined", the FOMC statement said. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation. The Fed said Wednesday that it would eventually allow a small amount of bonds to mature without being replaced - an amount that would gradually rise as markets adjusted to the process.

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  • Kelly Blake