Why bond ETFs surged despite Fed rate hike

The Fed expects that inflation will not hit the current target, of two percent, and it has revealed plans for unwinding the post-asset purchasing balance sheet, which now totals nearly $4.5 trillion.

The Fed also says it expects to begin reducing its balance sheet this year "provided the economy evolves broadly as anticipated". The caps will be increased every three months until they reach fully phased-in levels.

US 10-year yields were last at 2.127 percent after touching 2.103 percent earlier, their lowest since November 10. The dollar.DXY was largely flat against a basket of currencies after reversing earlier losses, while the price of gold fell.

Fed futures markets now put the chances for another rate increase this year to below 50 per cent.

The committee chose to raise rates again despite an economic slowdown at the start of 2017, which it predicts will be temporary.

They forecast US economic growth of 2.2 percent in 2017, an increase from the previous projection in March. Annual inflation is running at 1.7 percent.

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Their forecast for rate hike pace barely changed compared to March's projections. The board expects to raise rates at least three times this year.

Yellen spoke to reporters after the central bank raised interest rates on Wednesday, and indicated she is not incredibly concerned about inflation weakness. But the central bank remained adamant that economic growth is raising moderately while inflation will start to rise to the bank's 2% target over the medium term.

The dollar strengthened slightly after the announcement while USA stock markets took it in their stride, though there was some further unrelated softening of key tech stocks such as Amazon, Facebook and Google. It is bloated with the huge number of U.S. government bonds, or treasuries, and mortgage-backed bonds it bought in the years after the 2008 financial crisis in order to lower long-term interest rates and pump prime the economy with cash.

Minneapolis Fed President Neel Kashkari dissented in Wednesday's decision.

The plan announced Wednesday calls for the Fed to reduce its holdings by allowing an increasing amount of maturing securities to be run off each month. It was only the third hike since Fed chair Janet Yellen had ended the flatline interest rate policy that followed the severe financial crisis which broke out 10 years ago.

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