US Fed keeps interest rates unchanged as inflation remains close to target

Morgan Stanley's Zentner Says Inflation Moving Higher

Morgan Stanley's Zentner Says Inflation Moving Higher

In late March, the Fed raised interest rates by a quarter percent for the first time this year during Jerome Powell's first meeting as Chairman.

The Fed recognizes the recovery in growth and the rise in inflationary pressures.

Yesterday the Federal Open Market Committee (FOMC) - the policymaking arm of the Federal Reserve - finished its May meeting. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low.

The Fed dropped language in previous post-meeting statements that said they were closely monitoring inflation.

The FOMC's two-day meeting followed the release of data Monday that showed inflation measured by the central bank's preferred gauge had hit its 2 per cent target after being below that goal for nearly every month since April 2012.

"There wasn't any particular news to get it going other than the Fed staying the course, and that contributed to the slide in stock prices", said Robert Pavlik, chief investment strategist, senior portfolio manager at SlateStone Wealth LLC in NY. The Fed lifted its benchmark rate three times past year and began to slowly trim its balance sheet. In March, personal consumption expenditures (PCE) rose 1.9% over the prior year when stripping out food and energy. Any undershooting of the 1.2% core inflation estimate could extend losses for the single currency today. "We've reached full employment, inflation has hit 2 percent".

USA dollar notes are seen in this November 7, 2016 picture illustration.

USA 10-year yields were at 2.970 percent, down from 2.976 percent late on Tuesday.

The U.S. dollar bought 109.68 Japanese yen, lower than 109.80 Japanese yen of the previous session. The wording is a new addition to the statement, though it has been mentioned several times by Fed officials in recent speeches.

It gave the economy a thumbs up: "T$3 he labor market has continued to strengthen and...economic activity has been rising at a moderate rate". If the administration enacts more tariffs on foreign goods coming into the United States, it's likely to hurt the economy by causing businesses to pull back on some investments and forcing Americans to pay even higher prices for some items. Market-based measures of inflation compensation remain low.

The official statement read: "Inflation on a 12-month basis is expected to run near the Committee's symmetric 2 per cent objective over the medium term". The Federal Reserve noted inflation had moved up but said its two percent target was "symmetric", indicating there was margin to fluctuate above or below that level.

"The stance of monetary policy remains accommodative, thereby supporting strong labour market conditions and a sustained return to two per cent inflation", the FOMC said. While leaving rates unchanged as expected at the conclusion of its two-day meeting in Washington on Wednesday, it added a second reference to hammer the message home.

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