Fed leaves rates unchanged, says inflation close to target

Matthew Sheridan of AllianceBernstein

Matthew Sheridan of AllianceBernstein

The Federal Reserve held interest rates steady on Wednesday and expressed confidence that a recent rise in inflation to near the US central bank's target would be sustained, leaving it on track to raise borrowing costs in June.

"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.

"Despite rising trade tensions, more volatile financial markets, and poor weather, businesses are adding a robust more than 200,000 jobs per month", said Mark Zandi, chief economist of Moody's Analytics.

Information released by the Fed in March showed that a bare majority of the 15 participants in the monetary policy committee expect no more than two further quarter-point rate hikes in 2018.

The large-cap S&P 500 Index (NYSEARCA:SPY) declined 0.7% to close at 2,635.67. The yield on the benchmark 10-year US Treasury note dipped to 2.964%, from 2.976%.

Here are the key takeaways from the policy meet of the Federal Open Market Committee.

"The Fed sees little reason to be concerned with inflation marginally above its 2.0 per cent target, particularly after such a long period of underperformance", Clarke said. "It is expected to run near the Committee's symmetric two per cent objective over the medium term". The Fed also signaled it was willing to let inflation rise above 2%, stating that it's a "symmetric" target.

Finally, the FOMC approved the decision to hold rates steady unanimously, though it has publicly disagreed about how aggressive the path forward should be.

The dollar has been buoyed in recent weeks by the strong USA economic outlook and rising yields amid signs of a slowdown in some other developed economies, especially in Europe.

All indicators pointing up The Fed on Wednesday acknowledged that the labour market continued to strengthen and economic activity is rising at a moderate rate. Mortgage rates climbed to their highest level in over four years last week with the 30-year fixed-rate mortgage increasing for the third consecutive week to 4.58 percent.

He said the USA dollar was also helped by figures showing economic growth in the euro-area slowed in the first quarter.

U.S. interest rates are at 1.5 per cent to 1.75 per cent, the highest in a decade.

Those who voted were Jerome Powell, Chairman; William Dudley, Vice-Chairman; Thomas Barkin; Raphael Bostic; Lael Brainard; Loretta Mester; Randal Quarles and John Williams.

The Fed cites the lowest unemployment level in 18 years as one reason it feels confident about lifting interest rates at least one more time this year.

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

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