Federal Reserve Tightens Policy Further

The last few trading sessions were dominated by major announcements from global central banks.  Leading off was the US Federal Reserve which concluded its two-day FOMC Meeting with a decision to raise the benchmark interest rate by 25 basis points to 1.25%.  Although recent data has not been as strong, the Fed nevertheless raised its growth projections for 2.20% expansion during the 2017 calendar year.  Apart from the more optimistic outlook, Federal Reserve Chairwoman Janet Yellen also unveiled plans to gradually unwind the balance sheet starting this year.  However, certain data may derail these plans, especially after headline consumer inflation fell to 1.90% in May alongside deteriorating housing fundamentals.

Switching gears, the UK may be approaching a monetary policy adjustment sooner than anticipated.  The pickup in headline inflation to 2.90% has been outpacing gains in wage growth which came in at 2.10% for April, increasing pressure on the Bank of England to raise rates.  Three members of the Monetary Policy Committee dissented from the decision to keep rates on hold, underscoring the increasingly hawkish stance of policymakers.  Finally, the Bank of Japan also refrained from adjusting monetary policy during the latest decision, opting to leave interest rates and quantitative easing on hold while upgrading the growth outlook.