US Federal Reserve raises key rate by 0.25%

As widely expected, the US Federal Reserve on Wednesday responded to positive economic news and raised its short-term interest rate by a quarter percentage point. The action is likely to have implications for China's central bank, the People's Bank of China (PBOC), and on the amount of capital leaving the mainland, analysts said.

The increase in the Fed's benchmark rate to a range between 0.75 percent and 1 percent comes after it lifted the rate in December by a quarter percentage point for just the second time in the past decade. In a statement, the Fed said the economy was expanding at a "moderate pace" and that it was now focused on stabilizing inflation.

The Fed action follows strong job growth in January and February, healthy consumer spending and the so-called Trump effect.The stock market has been rallying since the election of Donald Trump on anticipation of tax cuts, infrastructure spending and regulatory relief even though uncertainty surrounds much of the new president's proposals.

Another factor is the state of the global economy. Analysts said fears of a severe slowdown in China have largely disappeared while growth in Europe is showing signs of a rebound.

The increase means consumers and businesses will pay slightly higher interest rates on loans, credit cards and mortgages. Savers are unlikely to benefit immediately because banks tend to raise interest rates on loans more quickly than on deposits.

Sung Won Sohn, a professor of economics at California State University Channel Islands in Camarillo, California, said in an email the move will affect the yuan and the conduct of monetary policy by the PBOC.

"The market has factored in the hike already. The latest increase will reinforce the sentiment in the market that the Federal Reserve is very serious about combating future inflation and offsetting some of the fiscal stimulus coming from the Trump administration," he said. "In short, the trajectory of the interest rate is expected to be more frequent and steeper."

China's central bank chief Zhou Xiaochuan said recently that the Chinese currency, the yuan, will stabilize this year amid a firming economy and global confidence in the country's growth prospects. He also reiterated that the fall in China's foreign exchange reserve is a normal occurrence.

China reduced its holding of US Treasury securities in January after adding $9.1 billion the previous month, the latest data from the US Treasury Department showed on Wednesday. China reduced its holdings of Treasurys by $7.3 billion in January, with total holdings down to $1.05 trillion.

On Wednesday, Fed members projected that they will raise rates two more times in 2017, though it all depends on how the economy performs. The Fed had raised rates only one time each in 2015 and 2016.

Xinhua contributed to this story.

paulwelitzkin@chinadeailyusa.com