World, Economy, Americas

US Fed to ‘soon’ raise interest rates

Bank to use cap limits to gradually unwind balance sheet

25.05.2017 - Update : 25.05.2017
US Fed to ‘soon’ raise interest rates FILE PHOTO

By Ovunc Kutlu

NEW YORK 

The Federal Reserve's next interest rate increase will be "soon", according to minutes from the bank’s meeting in May that were revealed Wednesday.

"Most participants judged that if economic information came in about in line with their expectations, it would soon be appropriate for the Committee to take another step in removing some policy accommodation," the minutes said.

The unemployment rate in April fell to 4.4 percent, its lowest level since May 2007, supporting the possibility of a rate hike in June when the bank will meet.

The Fed increased its benchmark interest rate three times since December 2015.

The central bank also said it will begin to gradually unwind its massive $4.5 trillion balance sheet later this year by using "cap limits" that will determine how much assets will be rolled off each month.

"The caps would initially be set at low levels and then be raised every three months, over a set period of time,” the Fed said. “The final values of the caps would then be maintained until the size of the balance sheet was normalized.”

The gradual process is expected to prevent any surprises in the markets.

"The Fed's plan to proceed very, very, cautiously with the balance sheet run-off ... is that the risk of an adverse reaction in the bond market should be smaller," Paul Ashworth, the head U.S. economist at Capital Economics, said in a note.

After the 2008 financial crisis, the Fed used its balance sheet to keep interest rates low to help the U.S. economy recover.

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