May 24, 2018

US Federal Reserve Keeps Interest Rates Unchanged at 1.5 - 1.75 Range

03 May 2018, 01:40 | Kenneth Drake

US Federal Reserve Keeps Interest Rates Unchanged at 1.5 - 1.75 Range

US Federal Reserve Keeps Interest Rates Unchanged at 1.5 - 1.75 Range

"The Fed sees little reason to be concerned with inflation marginally above its 2.0 percent target, particularly after such a long period of underperformance". It downplayed a recent slowdown in economic and job growth, saying the activity had been expanding at a moderate rate and job gains, on average, had been strong in recent months.

The change in the central bank's rhetoric is very important because 2 percent inflation is the Fed's mandate and a healthy enough level to warrant more frequent rate hikes. Experts say the two-percent target is symmetric, meaning it would be equally problematic if inflation lingers too far above or below that level. Investors had all but ruled out another increase at this week's meeting.

"Officials are implicitly endorsing the high probability of another rate hike in June being priced into markets", writes High Frequency Economics' Jim O'Sullivan.

The U.S. central bank kept the interest rates unchanged on Wednesday after concluding its two-day monetary policy meeting, in line with market expectations.

"The market is also probably pretty long (dollar/yen) now", Horchani said, adding that the dollar could face some downside risk against the yen, if USA equities come under pressure on Thursday. However, there were some notable changes in the language of the statement. In its March statement, the Fed indicated business investment had "moderated" from a strong fourth quarter. It added that risks to the outlook appear roughly balanced, removing a previous reference to "near-term risks".

The Fed is widely expected to raise interest rates next month as inflation continues to gather speed.

But data released on Monday showed price gains are now effectively at the Fed's target.

It wasn't clear to what extent the Fed's statement contributed to the pullback, though the prospect of an accelerated pace of rate increases could eventually weigh down a stock market that has always been supported by ultra-low rates. Still, there are enough factors (such as the Fed's looming June rate hike, improving US economic conditions, and rising US 10-year treasury yields) as well as uncertainty (primarily trade talks between US-China) to support the US dollar.

Expectations of faster-than-expected rate rises in the USA, as well as a rapid covering of positions by investors short on the dollar, has sent the greenback to its strongest level since mid-January. Fed policymakers had flagged the potential negative impact of the conflict in recent public comments, but adopted a wait-and-see attitude.

Federal Reserve officials left interest rates unchanged, acknowledging inflation is close to target without indicating any intention to veer from their gradual tightening of monetary policy.

The U.S. Federal Reserve raised interest rates on Wednesday for the second time.

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