Federal Reserve, as expected, raises US interest rates by 25 bp

The Federal Reserve raised interest rates on Wednesday for the second time in three months, citing continued US economic growth and job market strength, and announced it would begin cutting its holdings of bonds and other securities this year.

The decision lifted the U.S. central bank’s benchmark lending rate by a quarter percentage point to a target range of 1.00 per cent to 1.25 per cent as it proceeds with its first tightening cycle in more than a decade.

In its statement following a two-day meeting, the Fed’s policy-setting committee indicated the economy had been expanding moderately, the labour market continued to strengthen and a recent softening in inflation was seen as transitory.

The Fed gave a clear outline on its plan to reduce its US$4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, most of which were purchased in the wake of the 2007-2009 financial crisis and recession.

“The committee currently expects to begin implementing a balance sheet normalisation programme this year, provided that the economy evolves broadly as anticipated,” the Fed said in its statement.

According to an addendum released with the policy statement, the Fed anticipates the balance sheet reduction plan would feature halting reinvestments of ever-larger amounts of maturing securities.