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Fed's Yellen: Inflation Decline Driven By One-Off Factors

Fed's Yellen: Inflation Decline Driven By One-Off Factors

Fed officials are wrapping up their two-day June meeting. That's the level the Fed believes is a neutral rate - neither stimulating growth nor restraining it. This would bring the fed funds rate to a range between 1.00-1.25%. That buying pressure holds down Treasury rates.

The next step for the Fed will be to reduce its balance sheet and stocks could experience bouts of volatility in the coming months due to both political surprises and Fed policy communications.

With the Fed's decision hours away, bond bulls still seem to be holding sway: Speculators in 10-year futures are close to the most bullish since 2007, while a market-implied gauge of consumer price growth for the next decade is the lowest since November. Similarly, if you're a retiree living in part off of bond interest income, the quarter-point rate hike won't solve your money problems.

The Fed's statement noted that price rises have slowed recently. Most economists expect it to be much larger than before the crisis, but the Fed has given no formal guidance.

The economy grew at a rate of 1.2 percent in the first quarter of this year, about half as fast as it did in the final three months of 2016.

And the most important pillar of the economy - the job market - remains solid if slowing, with employment at a 16-year-low of 4.3 percent - even below the level the Fed associates with full employment. While short-term market expectations have remained basically stable, longer-term market expectations have fallen since the last rate hike.

The S&P 500 was up 0.53 points, or 0.02 percent, at 2,440.88 and the Nasdaq Composite was up 1.88 points, or 0.03 percent, at 6,222.24. In the longer run, policy makers see the jobless rate at 4.6%, down slightly from 4.7% in March.

Secondly, market participants seek information about the Fed's possible balance sheet reductions (as gradual reductions in its portfolio may raise long-term rates).

To cope with the recession that started in 2007, the Fed cut interest rates almost to zero, a record low, in a bid to cut the cost of borrowing and encourage economic activity and cut unemployment.

ANALYST TAKE: "The backdrop to the Fed's policy announcement later today is one where USA equity markets moved to record highs yesterday, shrugging off last Friday's sell off in the tech sector", said Neil MacKinnon, global macro strategist at VTB Capital. The divergence in recent months is not this severe, but is something worth watching moving forward.

"We expect Bostic and Mullinix will vote like their predecessors, at least initially", said Feroli.

One question mark facing the Fed this year is the future of Yellen. Add to this the inflation data yesterday showing that United Kingdom consumer prices are rising at their fastest rate of increase in 4 years, it paints a picture where people are increasingly finding that their employment income is covering less and less of household bills. Such an increase in the federal-funds rate - the interest rate the Fed controls that sets the tone for other rates - won't have a huge impact on people's budgets. "The biggest surprise would be a Fed that is determined to wait and see whether data continues to weaken before making any adjustments - which could see a sharply United States dollars rally - but that isn't our base case". The reasoning is that the policymakers will want more time to determine whether a slowdown in growth and inflation at the start of 2017 was indeed "transitory", as they described it in May, or the start of another slump that could lead the Fed to halt its rate hikes.

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