US interest rates rise by 0.25%

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    Janet YellenImage copyright Getty Images

    The US Federal Reserve has said it would raise its key interest rate by 0.25%, the second rise this year.

    The central bank voted to raise its key rate target to a range of 1% to 1.25%.

    That’s the highest level since 2008, when policymakers cut rates to encourage borrowing and spending after the financial crisis.

    The bank also said it would begin cutting its bond holdings and other securities this year.

    It cited continued US economic growth and job market strength as reasons for raising its benchmark interest rate.

    “Our decision … reflects the progress the economy has made and is expected to make,” said Federal Reserve Janet Yellen.

    Mixed data

    The rise was widely anticipated after a low unemployment rate, but other economic indicators, including inflation, have been weaker.

    Data on Wednesday showed US consumer prices unexpectedly fell in May and retail sales recorded their biggest drop in 16 months.

    This has raised questions about the bank’s future course.

    Federal Reserve policymakers have been grappling with when and how to alter the policies put in place after the 2008 financial crisis to boost economic activity.

    Bond buying

    At the time, they slashed interest rates and bought up US treasuries and mortgage-backed securities to keep rates low.

    In 2014 the bank stopped its bond purchase program, known as quantitative easing, but it has continued to reinvest the assets on its books.

    On Wednesday, policymakers said they aim to reduce that balance sheet, by reinvesting payments from those securities only above certain caps, totalling $10bn.

    The cap would escalate in three month intervals. It would start implementing those policies this year, assuming economic growth continues.

    Ms Yellen said she’s not sure how far the committee will want to reduce the holdings over the long run, but she said they would be levels “appreciably below” those seen in recent years though larger than before the financial crisis.

    Rate hikes

    The Fed raised interest rates for the first time since the crisis in December 2015.

    Policymakers acted in December 2016 and again in March.

    They have said they expect to raise rates at least three times this year.

    The moves depend on the strength of the economy, which has been mixed.

    On Wednesday, the US Labor Department reported that prices for goods excluding food and energy increased by 1.7% from May 2016, slowing steadily from earlier in the year.

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    That fell short of the Federal Reserve’s target of 2%.

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