WASHINGTON—The Federal Reserve said it would raise short-term interest rates and spelled out in greater detail its plans to start slowly shrinking its $4.5 trillion portfolio of bonds and other assets this year.

Fed officials said they would increase their benchmark federal-funds rate on Thursday by a quarter percentage point to a range between 1% and 1.25% and penciled in one more increase later this year if the economy performs in... </s> The Federal Reserve increased short-term interest rates by a quarter percentage point on Wednesday, and outlined a plan to trim its massive bond holdings amassed to bolster a recession-weakened economy.

The Fed's rate hike, to a 1.0-to-1.25 percent range, comes as the economy gives off mixed growth signals, with gross domestic product expansion at a mere 1.2 percent in the first quarter but unemployment at a low 4.3 percent in May. "The economy will continue to expand," Fed Chairwoman Janet Yellen said at a news conference, adding that job growth was "solid."

Meanwhile, the inflation rate is still below the 2 percent level that the Fed deems necessary for a healthy, growing economy and stable prices. The personal consumption expenditures measure, the Fed's preferred measure, inched up 1.7 percent in April, versus the year before.

The latest action of the Fed's policy-making panel, called the Federal Open Market Committee, marked the fourth increase in a gradual sequence that began in December 2015. The Fed paused after that, as tumult like Britain's vote to exit the European Union, jolted the financial world. It resumed last December with a 0.25% raise and added another 0.25% boost in March.

Will the Federal Reserve raise interest rates in June?

"We're not moving so aggressively as to put a brake on continued improvement in the labor market," Yellen said.

This latest in a series of raises is a reversal of the Fed's action to combat the financial crisis and the Great Recession. In 2007, as the economy worsened, the benchmark federal funds rate was 5.25 percent. The central bank began lowering it to near zero by the end of 2008.

Also as a result of the financial crisis, the Fed also started an unprecedented stimulus program to buy long-term bonds -- Treasuries and mortgage-backed securities -- in a bid to keep down long-term rates, and thus spur business and consumer borrowing and spark economic growth. From asset holdings of $900 billion before the recession, the Fed ended up expanding its balance sheet to $4.5 trillion.

On Wednesday, the Fed indicated that it would decrease the bond holdings eventually by $50 billion per month, or $600 billion per year. That should help long-trim bond yields to rise. But the process will be gradual, and take "years" to accomplish, she said, adding "like watching paint dry."

Exactly when the next rate increase will be is a matter of conjecture. But the Fed indicated it likely would increase short-term rates one more time this year, and three times in 2018.

All along, Yellen has made a point of wanting to assess how the economy was behaving before moving again. "They don't want to be in any hurry," said Jason Browne, chief investment officer of FundX Investment Group. Many investors recall how the Fed in 1994, fearing inflation, quickly doubled rates to 6 percent, which slammed the bond market.

In that spirit, the Fed also wants to unload its bond holdings gradually, so not to disrupt the markets. "They're going to tiptoe into it until they can normalize things," said Jim Brilliant, portfolio manager of the CM Advisors Fixed Income (CMFIX).

Low rates have been a tonic for the stock market, because they spur investors to buy shares in hopes of gaining better returns than they'd get from fixed-income assets. When the Fed announced it wanted to wind down its bond purchasing in 2013, raising the prospect of higher bond yields, stocks sank. Lately, however, stock investors have gotten used to the notion of increasing rates.

Since the last Fed bond buy in late 2014, the S&P 500 has gained 10.2 percent on an annual basis, said Allen Bond, co-portfolio manager of the Jensen Quality Growth Fund (JENSX). And since the first rate increase of this cycle, in December 2015, the S&P rose 13.4 percent annualized. As Bond explained, the "waning Fed support forced investors to judge stocks by their fundamental and valuation characteristics." </s> US Federal Reserve on Wednesday raised the benchmark interest rates for the fourth time since December 2015 and unveiled plan to start trimming its balance sheet.

“In view of realised and expected labour market conditions and inflation, the (Federal Open Market) Committee decided to raise the target range for the federal funds rate to 1% to 1.25%,” Xinhua quoted Fed as saying after concluding its two-day monetary policy meeting.

The central bank acknowledged the continuous progress in labour market while expressed their concerns over weak inflation.

Fed officials lowered their forecast for unemployment rate for 2017 down to 4.3%, compared to 4.5% projection made in March, while their forecast for inflation rate in 2017 was revised down to 1.6% from their forecast of 1.9% in March. </s> WASHINGTON — The Federal Reserve is raising a key interest rate for the first time in a year, reflecting a resilient U.S. economy and expectations of higher inflation. The move will mean modestly higher rates on some loans.

The Fed is signaling that additional rate increases will likely be made slowly as the economy improves and inflation edges closer to the Fed’s 2 percent target.

The central bank is increasing its benchmark rate by a quarter-point to a still-low range of 0.50 percent to 0.75 percent. The Fed last raised the rate in December 2015 from a record low near zero set during the 2008 financial crisis.

President-elect Donald Trump’s plans for tax cuts and infrastructure spending have led investors to expect that inflation will pick up in coming months. </s> WASHINGTON — The Federal Reserve is raising a key interest rate for the first time in a year, reflecting a resilient U.S. economy and expectations of higher inflation. The move will mean modestly higher rates on some loans.

The Fed signaled in a statement Wednesday that additional rate increases will likely be made slowly as the economy improves and inflation edges closer to the Fed's 2 percent target.

The central bank is increasing its benchmark rate by a quarter-point to a still-low range of 0.5 percent to 0.75 percent. The Fed last raised the rate in December 2015 from a record low near zero set during the 2008 financial crisis.

President-elect Donald Trump's plans for tax cuts and infrastructure spending have led investors to expect that inflation will pick up in coming months.

The economy, after growing at an anemic annual rate of 1.1 percent in the first half of this year, accelerated to a 3.2 percent pace in the July-September quarter. That pickup has lifted hopes that the economy will keep rising, fueled by steady hiring gains. The unemployment rate is at a nine-year low of 4.6 percent.

In the month since Trump's victory, investors have sent stock prices surging to record highs and driven up bond yields. The markets have calculated that Republican control of Congress will enable Trump to cut taxes, ease regulations and accelerate infrastructure spending — and that higher economic growth, inflation and corporate profits will result.

The Fed's action Wednesday should have little effect on mortgages or auto and student loans. The Fed doesn't directly affect those rates, at least not in the short run. But rates on some other loans — notably credit cards, home equity loans and adjustable-rate mortgages — will likely rise soon, though only modestly. Those rates are based on benchmarks like banks' prime rate, which moves in tandem with the Fed's key rate. </s> The rate decision of the Federal Reserve is shown on a television on the floor of the New York Stock Exchange, Wednesday. The Federal Reserve is hiking a key interest rate for the second time this year and is planning to reduce the size of its $4.5 trillion balance sheet as well. Fed officials voted 8-1 to raise the federal funds rate to a range of 1 to 1.25 percent. (AP Photo/Richard Drew) </s> The Federal Reserve is likely to raise short-term interest rates by a quarter percentage point after its two-day policy meeting concludes Wednesday, the fourth such increase since December 2015. Officials also will release new projections for the economy and interest rates, and could announce their plan for shrinking the Fed’s portfolio of Treasury and mortgage bonds. The central bank will release a statement and the forecasts at 2... </s> Washington: The Federal Reserve has raised a key interest rate in response to a solid US economy and expectations of higher inflation, and it foresees three rate hikes in 2017. The Fed's action Wednesday will mean modestly higher rates on some loans.

The central bank announced after its latest policy meeting that it's increasing its benchmark rate by a modest quarter-point to a still-low range of 0.5 percent to 0.75 percent. The Fed last raised the rate in December 2015 from a record low near zero set during the 2008 financial crisis.

The Fed's move, only the second rate hike in the past decade, came on a unanimous 10-0 vote. It also released an updated economic forecast that showed modest changes to its outlook for economic growth, unemployment and inflation, mainly to take account of stronger growth and a drop in the unemployment rate for November to a nine-year low of 4.6 percent.

Its new projection has the unemployment rate dipping to 4.5 percent by the end of 2017 and remaining at that level in 2018.

The Fed foresees economic growth reaching 1.9 percent this year, slightly above its forecast in September, and 2.1 percent in 2017. That's slightly more optimistic than it projected in September.

The Fed kept its long-term estimate for economic growth at 1.8 percent, far below the 4 percent pace that President-elect Donald Trump has said he can achieve with his program of deregulation, tax cuts and increased spending on infrastructure.

The Fed's estimate that it will raise rates three more times in 2017 is up from an estimate of two increases at the September meeting. Its policy statement showed only modest changes in wording from the previous meeting. It said "economic activity has been expanding at a moderate pace since mid-year" helped along by solid job growth.

Trump's plans for tax cuts and infrastructure spending have led investors to expect that inflation will pick up in coming months.

The economy, after growing at an anemic annual rate of 1.1 percent in the first half of this year, accelerated to a 3.2 percent pace in the July-September quarter. That pickup has lifted hopes that the economy will keep rising, fueled by steady hiring gains.

In the month since Trump's victory, investors have sent stock prices surging to record highs and driven up bond yields. The markets have calculated that Republican control of Congress will enable Trump to cut taxes, ease regulations and accelerate infrastructure spending - and that higher economic growth, inflation and corporate profits will result.

The Fed's action Wednesday should have little effect on mortgages or auto and student loans. The Fed doesn't directly affect those rates, at least not in the short run. But rates on some other loans - notably credit cards, home equity loans and adjustable-rate mortgages - will likely rise soon, though only modestly. Those rates are based on benchmarks like banks' prime rate, which moves in tandem with the Fed's key rate.

Mortgage rates have been surging since Trump's election victory last month on expectations that his economic program will accelerate economic growth and inflation.

Some Fed watchers expect faster growth to lead the central bank to shift its focus from trying to energize the economy to considering ways to counter the risk of too-high inflation. On that assumption, some are revising their forecasts for Fed rate hikes in 2017.

Before Trump's victory, the consensus view of economists was for two Fed rate increases next year. Now, some say they foresee three or possibly as many as four. Others think the Fed will be hesitant to step up the pace of rate hikes. For one thing, Trump's economic program still must win congressional approval and could undergo significant change along the way.

Last month after Trump's election, Fed Chair Janet Yellen told a congressional committee that Fed officials would be monitoring Congress' actions and "updating our economic outlook as the policy landscape becomes clearer." Other Fed officials have endorsed that wait-and-see approach. </s> "In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-1/4 percent," the statement said. </s> The Federal Reserve Open Markets Committee (FOMC) begins its deliberations today, which will be followed tomorrow, September 20, by a meeting statement, a summary of projections, and a press conference by the Chair.

This Federal Reserve meeting would be stepping out of the ho-hum character that recent meetings have acquired, as the Federal Reserve policy begins to acquire an aggressive edge. The central bank is expected to announce the timing to initiate the quantitative de-easing or balance sheet normalization program for its $3+ trillion bond portfolio that was built-up in response to the 2008 financial crisis. Most likely, the expectation is for this program to begin on October 1 and follow the wind-down path laid out in an earlier meeting.

The key question now remains whether the Federal Reserve will follow-through on its final interest rate increase for the year in December. The question assumes great importance, for a December interest rate increase will be too close to the initiation of a balance sheet rollback, expected to begin October 1, and can run the risk of over-tightening in a short span of time.

We had observed in the June article, Will the Federal Reserve Avoid A Slowdown, that:

Monetary Policy along with Earnings and Economy are three key determinants for market valuation. All three have been supportive of the stock market, creating a Goldilocks situation which has allowed the market to remain resilient - in spite of growing predictions for a deep correction and bear market fears from leading money managers, as pointed in our past articles.

However, a sharpening of the monetary policy elevates the risk of a US economic slowdown, thus beginning to change the supportive framework for the stock market and deviate from the synchronized global growth that has sent stocks higher.

Consequently, the level of flexibility that the Federal Reserve demonstrates on Wednesday, through its official comments, and in the press briefing, that its projected final interest rate increase this year is not baked-in, can determine how favorably the stock market responds. Note that the decision on the last interest rate increase for the year will not be clear until the December 12-13 meeting.

At present, the chance of a December rate increase, based on interest rate futures, is placed at 58%, up from 53% a week ago and 41% a month ago. Recall that the present Federal Funds interest rate band is at 100-125 basis points.

It seems more members of the 9-member voting committee are inclined to be driven by improvement in inflation metrics, instead of raising rates and expecting inflation to improve towards the 2% target in the future. These include Governors Lael Brainard, Neel Kashkari (Minneapolis), Charles Evans (Chicago), and Robert Kaplan (Dallas). In fact, Governor Neel Kashkari even mused recently that the current pace of interest rate increases has been aggressive and the economy is already beginning to pay a cost. It is his belief that the Federal Reserve is "overestimating how tight the labor market is," which can contribute towards explaining the low inflation and low wage growth.

Less than robust economic reports for August on nonfarm payrolls, retail sales, and inflation, lend credence to Governor Kashkari's reasoning and the overall argument for a more patient interest rate policy.

Many of the arguments for raising interest rates hinge upon the typical Phillips Curve, created by economist A. W. Phillips, which quantifies the inverse relationship that exists between an economy's unemployment rate and the commensurate rise in inflation through wage growth. So simply put, low unemployment translates into high inflation and vice-versa.

There is a wave of deflationary forces that continue to be unleashed as a result of improving economic efficiency. Just ask Target (TGT), Costco (COST), Best Buy (BBY), Kroger (KR) and Wal-Mart (WMT) how they are competing in a world of Amazon (AMZN), Google (GOOGL), and Facebook (FB). The famed Toys R'Us retail store chain filed for bankruptcy today in this new environment that is severely punishing for traditional retailers that find it difficult to adapt.

Technology is undermining the typical relationship of a low unemployment rate leading to inflation and appears to have meaningfully depressed the inflection point at which wage inflation may respond forcefully to low unemployment. Perhaps it is The Great Recession that has unhinged past relationships and recast traditional inflection points.

How robust is the Phillips Curve relationship between Unemployment and Inflation?

In an analysis done last year, in the post-Great Recession era, economist Olivier Blanchard reestimated the Phillips Curve and discovered that the relationship between unemployment and inflation has lost its steepness and is much flatter today.

In a posting 3 weeks ago, Federal Reserve Bank of St. Louis President James Bullard took the estimates of Blanchard to come up with the possibilities of inflation for different unemployment rate scenarios, which are presented below.

Reviewing the data, there appears to be significant room for Unemployment to still drop without spiking inflation. For every 50 basis point decline in the unemployment rate, there is a commensurate 10 basis point rise in the inflation rate. A declining unemployment rate no longer appears to provoke inflation to the same degree as in the past.

At the same time, inflation expectations, which play a key role in economic behavior, remain well-anchored amongst businesses and consumers.

Based on this outlook, the Federal Reserve should not feel chained by past norms to pursue a rising interest rate policy in a new paradigm where unemployment rate and inflation linkage has weakened considerably. There continues to be room for strategic patience.

Even though stocks have entered into a period of near-term elevated risk due to developments on the monetary policy front, and uncertain fiscal policy, the overall picture beyond near-term remains in favor of stocks, as discussed in the article, Partial Eclipse Maybe, But Not A Total One.

Any suggestion of an open-minded approach towards the next rate increase, which brings down the probability of a hike in December, will be considered accommodative and favorable to the stock market.

Amongst the many promising sectors, we believe Biotech stocks present a strong case for a higher portfolio allocation, and should continue to do well for the remainder of the year. The recent revival of another attempt to repeal the Affordable Care Act adds uncertainty till the end of September. But we believe Biotechs remains favorably poised and ready for further gains as discussed in the Biotech Bonanza article.

At this time we remain fully invested in our Prudent Biotech Portfolio, which is up +22% as of the end of August, and less than fully invested in our Graycell Small Cap Portfolio, which is up +36%. Some of the promising biotech and small-cap companies that can be considered for a portfolio include Celgene (NASDAQ:CELG), Exelixis (EXEL), Puma Biotechnology (PBYI), Acadia Pharmaceuticals (ACAD), Bluebird (NASDAQ:BLUE), Aerie Pharmaceuticals (NASDAQ:AERI), Novocure (NASDAQ:NVCR), Foundation Medicine (NASDAQ:FMI), Exact Sciences (NASDAQ:EXAS), Dynavax (DVAX), Amicus Therapeutics (FOLD), Arena Pharmaceuticals (ARNA), Myokardia (MYOK), Esperion Therapeutics (ESPR), Glycomimetics (NASDAQ:GLYC), Akebia Therapeutics (NASDAQ:AKBA), Loxo Therapeutics (NASDAQ:LOXO), Portola Pharmaceuticals (PTLA), Sangamo Biosciences (SGMO), Abeona Therapeutics (ABEO), Kronos Worldwide (KRO), Kemet (KEM), Weight Watchers (WTW) and Chegg (CHGG).

A balance sheet rollback should have a qualitatively similar impact as an interest rate hike - and doing both in close proximity, in our opinion, can have the economic impact of a double rate hike. This appears to be a riskier approach, particularly since it is not yet completely understood how quantitative de-easing may impact the economy, and what could be the unanticipated risks of a rollback.

In addition, geo-strategic concerns, the economic impact from two major hurricanes, and fiscal paralysis are other important considerations that call for the Federal Reserve to tread lightly on the interest rate pedal at a time when it is removing quantitative easing.

We believe signs of a restrained posture with regards to further interest rate increases this year will provide momentum for stocks to move higher, as it diminishes the risk of a Federal Reserve induced slowdown.

Even though there is the possibility of elevated risk for stocks during September and October, as detailed in the Partial Eclipse article, we believe a higher stock allocation (QQQ) (SPY) for the remainder of the year remains justified at this time.

Author's note: As always, kindly do your own due diligence. For additional information and helpful links, please check the Profile by clicking on the name above. Also, you can consider clicking the Follow button to receive such information immediately when published. Please feel free to add to this commentary or point out errors in the Comments section. Opinions can change with time and additional data.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Graycell Advisors or Prudent Biotech is not a registered investment advisor (RIA) and publishes quantitative-driven model portfolios for investors and RIAs. More can be learned from GraycellAdvisors.com. Some or all of the companies/stocks mentioned in the article may be now or in the past, part of the various model portfolios. In addition, although there are no personal positions presently, stocks mentioned can be part of portfolios of family and associates. Past performance is not a guarantee of future results. The information here is only provided for a general informational purpose and not as a recommendation, and is not guaranteed to be complete or accurate. Companies mentioned here may not be favored in the future as market trend changes and/or new information emerges, and no portfolio updates will be provided unless you are a model portfolio subscriber. Opinions, where expressed, can change with time and new information.
The U.S. Federal Reserve raises the federal funds rate by a quarter percentage point to a level between the 1.0-to-1.25 percent range, and outlines a plan to trim its bond holdings and other securities. This is the fourth increase since December 2015.