U.S. stocks edge higher; bond yields fall following Fed

Fed chair Janet Yellen struck a surprisingly dovish tone at recent Congressional testimony- Source Wikimedia Commons

Fed chair Janet Yellen struck a surprisingly dovish tone at recent Congressional testimony- Source Wikimedia Commons

FED IN FOCUS: The Federal Reserve is wrapping up a policy meeting on interest rates, and most investors expect it to hold them steady after raising rates three times since December. There is a risk that even if incoming data impresses and growth accelerates substantially, inflation might remain subdued for some time, especially as the low unemployment rate has yet to boost wages. That said, inflation is becoming the most important indicator for the central bank, and with inflation having declined to 1.6 percent in June compared to 2.7 percent in February, the 2-percent Fed inflation target seems harder to achieve and sustain.

The Fed noted after its two-day meeting that in view of realized and expected labor market conditions and inflation, it made a decision to maintain the target range for the federal funds rate at 1 to 1-1/4%.

Although the Fed gave no indication how many more interest rate increases to expect this year, the statement was slightly dovish in tone in this regard. Traders took that as reflecting concern that a slowdown in consumer price rises might not be temporary, and hence rate increases will come more slowly than they had expected.

U.S. sharemarkets rose to new to new highs as gold and oil also ended the day higher.

By the end of the year, the Fed projects that rates could return to a level that would neither encourage nor discourage economic activity.

"The weak dollar continues to put the Fed in a goldilocks environment where the market isn't concerning itself with rates", Ewing and Mitchell went on to say.

The start of balance-sheet normalization - possibly as soon as September - is another policy milestone in an economic recovery now in its ninth year. The two-year yield sank to 1.35 percent from 1.39 percent.

The Fed's cautious, yet generally positive, economic statement follows a slew of mixed data, including disappointing first quarter GDP and soft inflation numbers.

"In shrinking the balance sheet by allowing Treasuries and MBS to roll off, the Fed will be taking a step that directly affects financial conditions, arguably without making a substantial difference for the economy", said Stephen Stanley, chief economist at Amherst Pierpont in Stamford, Connecticut. The Standard & Poor's 500 index edged up less than 0.1 percent to 2,477.83, adding a whisper to the record high set a day earlier.

Some investors worry that markets are due to shake out of their unusually calm pattern as the Fed further raises rates and trims its balance sheet.

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