US Federal Reserve raises interest rates and says recovery is on track - as it happened

Capital Economists have provided a brisk summary of the Fed’s decisions today:

As widely expected, the Fed raise its policy rate target by an additional 25bp today, to between 1.00% and 1.25% and, despite the recent weakness of core inflation, Fed officials still expect to raise that rate once more in the second half of this year.

The Fed also laid out plans for shrinking its balance sheet, with the initial run-off even smaller than we had previously expected, although it offered no specifics on the timing of when that normalisation would begin other than “this year”.

Wall Street isn’t too happy with Janet Yellen’s comments.

The Nasdaq index has dropped by 1% after the Fed chair downplayed recent weak inflation data and signalled that US interest rates will continue to rise over the next couple of years.

The S&P 500 is down 0.25%, while the Dow Jones industrial average is flat.

Finally, Yellen gets a question about apprenticeships, and Donald Trump’s new push to get more Americans to develop their work skills on the job (a specialist subject for the President, of course).

Yellen agrees that it’s an important area.

It is hard for firms to find workers with appropriate skills right now, as the labor market is so tight.

It’s a particular problem for smaller businesses, she explains, as they have less latitude to retrain workers.

That’s the end of the press conference

Q: The president has credited you with being a ‘low interest rate’ person. Do you agree?

Yellen says she ‘strongly supported’ the Fed’s policy of keeping interest rates at record lows after the financial crisis -- so i guess she’s accepting the accolade, despite having just raised rates!

Q: What do you say to the group of economists who are calling for the Fed’s inflation target to be raised?

[This group, which includes Nobel laureate Joe Stiglitz, warned that the Fed could trigger a recession if it kept raising rates]

Yellen plays a straight bat (unlike the England cricket team today, alas), saying it’s a very important issue.

The Fed is open to a wide range of views, and might reconsider its target sometime in the future....ants to take in a wide range of views.

Fidelity’s chief economist, Anna Stupnytska, is surprised that Yellen is sounding more cautious - especially about inflation and wage growth.

Back to inflation...

Q: Is it possible that globalisation, and falling central bank credibility, mean we’ve entered an era of low inflation where it will be very hard to get wages and prices rising again?

Yellen doesn’t think that the Federal Reserve’s credibility has been impaired (but what else would a Fed chair say?!).

But it’s “certainly possible” that structural factors are partly to blame, she adds.

Yellen says she’s not seen much evidence that Donald Trump’s proposed tax and spending plans have changed consumer or business spending.

Q: Is the Fed worried about the recent run of weak inflation futures?

Yellen doesn’t sound too worried, saying that inflation can be “noisy” and affected by idiosyncratic factors.

She cites cuts to cell phone contract prices, and some over-the-counter medicines.

Yellen is now outlining the Fed’s plan to start reducing its balance sheet later this year [details here].

She confirms that the Fed will take a cautious approach, initially with a $6bn monthly cap on sales of Treasury bonds and $4bn on mortgage-backed securities.

This cap, which is expected to rise every quarter, will avoid any “market strains” as the Fed sells some of the assets bought during the financial crisis to stimulate the economy.

Yellen also cautions that there is no rush to take decisions about the long-run framework of monetary policy. Big decisions, like the ideal future composition of the Fed’s balance sheet, needn’t be taken for “quite some time”.

Janet Yellen also acknowledges the shooting in Virginia earlier today, where several people including Steve Scalise, Republican House majority whip, were shot.

Our thoughts are with those who were injured this morning, the Fed chair says.

Fed chair Janet Yellen explains that today’s interest hike reflects the “progress” in the economy, which appears to have “rebounded” after slowing in the first three months of 2017.

A pick-up in global growth is helping US exports, she says.

Yellen adds that the job market will probably strengthen further, but cautions that it is near its “maximum sustainable level”.

On inflation, she credits one-off factors for the recent slowdown in inflation.

And the bottom line - the Fed continues to expect that gradual increases in borrowing costs will be needed to keep inflation close to target, while sustaining the economic expansion.

But, rates are still likely to be lower than in previous economic cycles, she adds.

The most important news tonight is the new guidelines on Fed balance sheet reduction.

So says Tom Stevenson, investment director for personal investing at Fidelity International.

Stevenson explains:

There was never much doubt that the Federal Reserve would raise interest rates by a further 0.25% at today’s meeting to between 1% and 1.25%. ...

More important was what the US central had to say about its plans to rein in its bloated balance sheet, which has ballooned to $4.5trn since the financial crisis as the Fed has bought government and mortgage-backed bonds to underpin the American economy. The Fed said today that it would decrease reinvestment of maturing bonds at a steadily increasing rate until after a year it is holding back $30bn a month on Government bonds and $20bn on mortgage backed securities.

The Fed has taken another step towards “normalisation”, says Nancy Curtin, chief investment officer at Close Brothers Asset Management commented.

“Recent economic indicators have not been weak enough to prevent Yellen pulling the lever on the third rate hike in seven months.

Yes, inflation remains elusive, and wage growth relatively weak, but the data does not suggest growth has slowed enough to suggest a change in tack.

The decision to raise rates doesn’t signal the beginning of ‘tight’ monetary policy from the Federal Reserve, but it does mark another step towards normalisation, as well as confidence in the long-term recovery of the economy.”

Today’s interest rate hike shows that the Federal Reserve is confident that the US economy is recovering, says Kully Samra, UK Managing Director at Charles Schwab.

Samra adds:

Despite recent underwhelming jobs numbers, the underlying US economic data remains robust enough to warrant tightening.

While the economy is bouncing back from a weak first quarter, earnings have been strong and even in the wake of continued political uncertainty, corporate confidence remains secure. The market has demonstrated that it is comfortable with gradual rate hikes and will be reassured that the Fed has today committed to its promises. We expect at least one more rate hike this year but incoming data will influence future decisions.”

We have some unexpected news - the Fed has outlined how it expects to start reducing its huge balance sheet.

Reuters has a great explanation:

The Fed gave a clear outline on its plan to reduce its $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 normalization program 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 that the balance sheet reduction plan would feature halting reinvestments of ever-larger amounts of maturing securities.

The Fed sees the cap for Treasury securities to be $6 billion per month initially, increasing in $6 billion increments at three-month intervals over 12 months until it reaches $30 billion per month.

For agency debt and mortgage-backed securities, the cap will be $4 billion per month initially, increasing by $4 billion at quarterly intervals over a year until it reaches $20 billion per month.

The Federal Reserve has updated its dot plot, which shows where each policymaker thinks interest rates will be over the next few years.

It shows that 4 policymakers expect rates will remain on hold for the rest of 2017.

Eight Fed voters predict one more rate hike -- the central view - and another four expect two.

As this chart shows, that means one voter is less hawkish than in March.

The US dollar has fallen by 0.4% against a basket of currencies as Wall Street digests today’s announcement.

In its prepared statement, the Federal Reserve says that America’s labour market has “continued to strengthen” since its last meeting.

Economic activity has been “rising moderately” so far this year, the Fed says:

Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand.

The Fed also acknowledge that inflation is “somewhat below 2%” – a nod to today’s weaker-than-expected CPI data.

They add:

Inflation on a 12-month basis is expected to remain somewhat below 2% in the near term but to stabilise around the committee’s 2% objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

Just over 15 minutes to go, until the Federal Reserve either delivers the interest rate hike that the markets expect, or shocks us by leaving borrowing costs on hold ...

Earlier, on the BBC’s Today programme, the consensus seemed to be the US Federal Reserve would be raising rates. George Magnus, economist and senior advisor at UBS said:

I think they [the Fed] really want to do this [rate rise] and I think they want to do it because they are trying to normalise the situation. They’re quite worried about sub prime – in other words less than good quality automobile loans and commercial real estate. So they have other concerns in addition to the economy. After today, though, things might change, because if inflation doesn’t pick up in the United States later this year then the expectations that the Federal Reserve will keep going will be revised.

Megan Greene, chief economist at Manulife Asset Management, said:

The US economy is fundamentally a 2% growth economy. All the soft data, the surveys have been great but if you look at the hard data it doesn’t look as great, it doesn’t look terrible either. The US recovery is continuing, it’s not as strong as the markets might suggest ... I also agree that the Fed will hike rates today. As long as the markets are aligned as they are with yields pretty low, the dollar fairly weak but equity markets soaring, it gives the Fed room to hike. Of course they’d like to not just normalise rates but start shrinking their balance sheet but there’s a deadline for that which is when Janet Yellen’s term ends next year.

On oil, Chris Beauchamp, chief market analyst at IG, said:

Oil prices are in freefall again, thanks to a second consecutive failure of forecasters on the oil inventories front. Stockpiles dropped by much less than forecast, although at least they got the direction right this week, after last week’s shock rise in inventories. What is particularly noticeable is that oil production continues to rise, even as prices fall. It looks like everyone is keen to get as much sold before another rout in prices. WTI now trades at its lowest level in six weeks, with little sign of a turnaround in place.

Both Brent crude and West Texas Intermediate are now down more than 2%.

Back with the dollar, and it has fallen to its lowest level against the euro since the start of November. The single currency currently sits at $1.1286, up 0.64%, after reaching $1.1295.

Jasper Lawler, senior market analyst at London Capital Group, also believes the weak US data casts doubts on further Federal Reserve rate hikes after today:

A double dose of soft economic data sent the US dollar plunging and gold rallying before the Federal Reserve rate decision. Slowing inflation and flat retail sales add to the growing sense that today’s meeting could see the last US rate rise this year.

We would be in a state of shock if the Federal Reserve didn’t lift interest rates at its meeting later today.... Movement in the dollar will depend on what kind of signal policymakers give about the next hike, possibly in September. The US economy has not been firing on all cylinders but the Fed risks losing credibility if it backed off from a rate hike when it’s been so heavily intonated. A ‘dovish hike’ seems most appropriate, which may not be enough to generate enthusiasm for the dollar.

The weaker than expected US inflation and retail sales figures could mean the Federal Reserve being more cautious about further interest rate rises this year, says James Knightley of ING Bank:

This [data] creates more of a headache for the Federal Reserve in how it communicates its hiking strategy. They keep talking about slower growth and weaker inflation being transitory (the word was used on nine separate occasions in the minutes to the May FOMC meeting), but the longer we go without seeing growth and inflationary pressures is resulting in the markets becoming less convinced about higher interest rates.

With little sign of tax reform and fiscal stimulus coming the Fed will likely sound more cautious on the prospect of an additional hike later this year even though their forecasts will almost certainly include it when released later on today.

Our economics editor, Larry Elliott, says Britain’s wage squeeze since the financial crisis struck is “staggeringly” bad.

He writes:

Cast your mind back to March 2008. The financial markets have been in turmoil since the previous summer and in the previous month the Labour government has been forced to nationalise the troubled bank Northern Rock. Few realised it at the time but the economy had peaked. A deep and brutal recession was about to begin. In that month, the average basic weekly wage, excluding bonuses, was £473.

The recession officially came to an end by late 2009 and after a couple of years of weak and patchy growth, the worst seemed to be over. Activity picked up, unemployment started to come down. Yet more than nine years after the slump of 2008 began, wages – the yardstick by which most people judge whether the economy is doing well or not – have not recovered. In fact, according to the Office for National Statistics, they have gone backwards. The average basic weekly wage, adjusted for movements in prices, now stands at £458.

More here:

Here are the Liberal Democrats on the fall in real wages. The party’s leader Tim Farron joined the calls for an end to the freeze on public sector pay rises:

For a government that used to bang on about the Just About Managing, they are doing diddly squat to help them. This represents the biggest fall in real wages since August 2014.

Staff are working more hours, for less pay and with higher levels of stress. More people are living pay cheque to pay cheque and having to struggle at the end of every month to get by.

Britain needs a pay rise and it is time the government delivered it, especially for the public sector.

Our nurses, care workers, teachers and soldiers have bared the brunt of the economic crisis and seen their pay capped and wages squeezed. Enough is enough. We need to raise the wages of our public sector workers.

If you’re just tuning in, here’s our news story on today’s unemployment report:

The pound has now dropped into the red, as the City shows its disappointment with Britain’s poor wage growth.

Sterling is now down 0.2% today at $1.2725.

UNISON, the union, says today’s report shows how much stress the public sector is facing, as it also calls for the 1% pay cap to be ditched.

General secretary Dave Prentis warns:

“Demand for public services continues to rise, but these figures confirm that the workforce is still being cut.

“Services are being starved of funds and staff shortages mean nurses, paramedics, teaching assistants and council employees are having to work even harder, but for less money.

“Public sector workers have not had a proper pay rise since 2011. It is no wonder they feel so undervalued. The public sector pay cap must go.”

The rise of Britain’s ‘Gig economy’, with its low-paid, precarious jobs, is surely a factor behind the weak wage growth.

Dr John Philpott, director of The Jobs Economist, says it is “remarkable” that pay is so weak when the employment rate is at a record high of nearly 75%.

Hard times and near full employment make strange bedfellows, highlighting the extent to which a de-regulated labour market with an abundance of workers available to fill low wage vacancies has altered the UK jobs landscape.’

The Resolution Foundation have crunched today’s figures, to show how Britain’s workers’ pay is still below its levels before the financial crisis (once you adjust for inflation).

They also show how the economy is still creating jobs, although some parts of the country aren’t feeling the benefits as much as others:

Ben Brettell, senior economist at Hargreaves Lansdown, also fears that the pay squeeze will hurt growth:

The UK economy faces a dangerous cocktail of political uncertainty, slowing growth and shrinking real wages. First-quarter GDP figures were disappoining, while a recent report from VISA confirmed consumers are under pressure, with spending falling 0.8% year-on-year in May.

Households are being squeezed from both directions, with inflation rising faster than expected and wages rising more slowly. This doesn’t bode well for economic growth – the UK economy is heavily reliant on the consumer and falling real incomes will eventually translate into lower retail sales.

The pay squeeze puts more pressure on the Bank of England to consider raising interest rates to curb inflation, argues Neil Wilson of ETX Capital (whose hopes of stronger wage growth have been firmly dashed).

He writes:

Wages are climbing at a rate of just 2.1%, or just 1.7% when you excluded bonuses. This run rate is just not enough to sustain consumer spending where it has been of late when inflation is accelerating. Average earnings in real terms slumped by 0.6%, or 0.4% including bonuses. This will have a material effect on GDP growth in the second quarter.

The pay-inflation gap is widening despite record low unemployment, which is also a sign of structural problems for the UK economy. Total pay growth was running above 3% in the first half of 2015, when inflation was anchored at around zero. That sweet spot is well and truly over.

Real pay is falling across the economy, points out Professor Geraint Johnes, Director of Research at the Work Foundation:

On the three month average measure, pay settlements fell from 2.3% in March to 2.1% in April [that’s including bonuses].

The fall in the single month measure is more dramatic – from 2.4% to 1.2% - though it should be noted that this measure is generally held to be less reliable.

On the single month measure, there were falls in average weekly earnings in both the finance and construction sectors in April. There is no sector of the economy in which wages are currently rising as fast as prices. The squeeze in real wages is back, and there seems to be little prospect of an immediate recovery.”

Maike Currie, investment director for personal investing at Fidelity International, has a few theories for why real wages are shrinking again.

One could be ‘slack in the labour market’ - which is economist speak for the fact that the jobs market isn’t working as well as it could.

This is usually down to underemployment: people working part-time who want a full-time job or hidden unemployment: people who are not actively looking for work but who would rejoin the workforce if the jobs market were stronger.

Another factor is the problem of poor productivity. This isn’t unique to the UK and has been an issue in many developed world economies since the financial crisis. While most economists concur that slowing productivity is one of the most serious problems in their field today, few can agree on the cause and still less on the right response.

Whatever the reason, the situation looks pretty bad:

The fall in UK real wages is likely to hurt economic growth, warns Naeem Aslam of Think Markets.

It is the UK consumers who have been pulling the UK economy and if we see them slowing down, it surely means that economy cannot do well

Brexit is certainly on the centre stage when it comes to this and I personally believe that investors are feeling the impact of this.

Today’s report also shows that British workers are suffering the worst wage squeeze in two and a half years.

The ONS says:

Between February to April 2016 and February to April 2017 in real terms (that is, adjusted for consumer price inflation) total pay for employees in Great Britain fell by 0.4%, the lowest growth rate since July to September 2014.

The pound is dipping back as City traders brace for the jobs report...

The pound should strengthen if today’s wage figures are less grim than feared.

Neil Wilson of ETX Capital says:

Unemployment is likely to be decent so the focus is on earnings. Stronger-than-expected wage growth could help support sterling a touch as it will help offset concerns that falling real wages is destroying consumer spending.

Yesterday’s inflation beat at 2.9% highlights the problems facing the economy so a sign that earnings are at least trying to keep pace will be welcome and allay concerns that consumers stop spending.

City economists expect that total pay rose by 2.4% in the three months to April - but only by 2.0% if bonuses are stripped out. We’ll find out if they’re right in 20 minutes...

You can get up to speed on the state of Britain’s labour market with these charts from economist Rupert Seggins:

The US dollar is under some pressure today ahead of the Federal Reserve decision, which is helping nudge the pound up.

With an interest rate hike today ‘priced in’, traders are focusing on the tone of the decision from the Federal Reserve’s Open Market Committee.

Kit Juckes of French bank Societe Generale expects the Fed to sound cautious about the long-term path for interest rates.

The FOMC’s response is likely to be a ‘dovish hike’ and that’s priced in, to a large degree. Uncertain about how much slack there is in the economy or the labour market, FOCM members are inclined to want to ‘normalise’ rates while they have the chance, but they seem very pragmatic about the longer-term outlook.

So more likely to raise rates now, without overlay hawkish commentary, and then lay the groundwork for another hike in the autumn if markets don’t take fright in the weeks ahead.

In the City, the FTSE 250 index - which contains medium-sized UK-focused firms - has jumped by 0.5% in early trading.

Housebuilder Bellway is the biggest riser, up 3.6%, after reporting that customer demand for new homes is still strong.

The blue-chip FTSE 100 index is flat, although its housebuilders (Taylor Wimpey, Barratt and Persimmon) are all rising.