Fed leaves interest rates under 1.75 percent following May meeting

by Susie Olson May 3, 2018, 14:14
Fed leaves interest rates under 1.75 percent following May meeting

Stocks in Europe followed Asian peers lower as investors began to switch their attention away from the Federal Reserve and back to earnings and the outlook for global trade. Ahead of the statement, some investors were nervous it might sound more hawkish on policy tightening after recent concerns about rising inflation.

Inflation goal The Fed is clear that it's nearing its inflation target of 2 per cent over the medium term. "Inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term." the Fed's statement said.

The Fed also indicated that inflation has firmed, coming closer to the Fed's two percent target.

The Fed's statement noted that the US job market has continued to strengthen along with a steady economy, now into its ninth year of expansion since the Great Recession ended. But interest rates are still at a very low level compared to where they were during much of the 1990s and early 2000s, when interest rates over 4 per cent were common.

The US economic growth cooled in the first quarter to an annualised pace of 2.3 per cent after averaging higher than 3 per cent in the previous three quarters.

"It looks like it maybe calmed some nerves (of investors) who maybe were expecting a faster pace of hikes because of the rise in inflation", said Collin Martin, fixed income strategist at Schwab Center for Financial Research in NY. The Fed had last increased rates in March.

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The next rate increase is expected in June.

"The gold market is seeing this as a little dovish, primarily because some continued to expect the Fed to hike four times this year and the messaging was a little bit soft", said TD Securities' Daniel Ghali.

In a unanimous decision taken at its two-day monetary policy review meeting here that ended on Wednesday, the US Federal Open Market Committee (FOMC) maintained status quo on the federal funds rate at the range of 1.5 per cent to 1.75 per cent, as was widely expected. A year ago, the 10-year yield was just 2.3 percent.

"Rising inflation expectations, an overall bullish commodity trend (late-cycle preference for commodities), geopolitical and financial risks are being offset by a rising dollar and rising real-rates", Saxo Bank analysts said in a note. Higher interest rates also raise borrowing costs for consumers and businesses and can crimp the affordability of major purchases like autos and housing. For years, the Fed has determined monetary policy based partly on the inflation level.

The president's nominations generally match mainstream views on the Fed's proper role in managing rates.

Even if Trump's selections all win approval, he would still have one more vacancy to fill on the seven-member board. Goodfriend's nomination squeaked out of a Senate committee on a 13-12 vote, with all Democrats opposed, indicating he could face difficulty winning confirmation by the full Senate.


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