Federal Reserve holds rates, on track for June interest rate hike

Federal Reserve holds rates, on track for June interest rate hike

Federal Reserve holds rates, on track for June interest rate hike

At its meeting today, the Federal Open Market Committee (FOMC) unanimously voted to hold the target range for the federal funds rate steady at 1.5 to 1.75 percent.

In their policy statement released Wednesday, Fed officials indicated they don't expect inflation to rise too high.

The FOMC next meets in June, when it is widely expected to raise the key rate by 25 basis points to two percent.

President Donald Trump signed into law $1.5 trillion in tax cuts at the end of last year, boosting most private forecasts of growth and employment for the coming two years. We think this further reinforces the case for rates not be hiked at next week's MPC meeting.

"I'm a bit surprised, but it does speak to the idea that they expect inflation to go over 2 per cent and they won't react to that", said John Vail, chief global strategist at Nikko Asset Management in NY. The Fed's preferred "core" inflation measure, known as PCE, which filters out volatile food and fuel prices, was within spitting distance of the Fed's 2 percent target in March.

"Inflation on a 12-month basis is expected to run near the committee's symmetric 2% objective over the medium term", the statement said.

Following a prolonged period of accomodation after the financial crisis of 2007-8 that impacted globally, the US Fed began its tightening cycle of rate increases in December 2015. The 10-year inflation break-even rate, which reflects the yield premium on the 10-year U.S. Treasury note over the comparable Treasury inflation-protected security, has settled recently at its highest levels in four years.

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The statement said the economy has been growing at a moderate rate.

"The statement carried only modest changes in wording, but they were meaningful nonetheless, highlighting that the Fed is optimistic on the outlook and intent on continuing to raise rates at a gradual pace", said Westpac analyst Elliot Clarke.

He said the USA dollar was also helped by figures showing economic growth in the euro-area slowed in the first quarter. That was down from 2.9 percent in the fourth quarter even though the tax cuts kicked in on January 1.

German manufacturing grew at the slowest pace in nine months in April, a survey showed on Wednesday, as new-orders growth slowed for the fourth consecutive month.

If there is another weak month with around 100,000 jobs created (as in March when just 103,000 were reported) then the odds for three rate rises in 2018 will fall. Analysts are looking for a payroll gain of 190,000 with a slight reduction in the unemployment rate to 4 percent. That would be the lowest rate since 2000.

Trade relations between the United States and China have already been strained as Trump has weighed imposing tariffs on up to $150 billion of Chinese imports. It also said risks to the economic outlook appeared "roughly balanced", and said it expected inflation to run "near" its goal over the medium term. That means the risks of a downturn are similar to the risks of the economy picking up.

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