Federal Reserve Leaves Interest Rates Unchanged

May 11, 2017, 23:21

Previously used to describe a period of inflation below the Fed's 2% target, that term was now used to describe a weakening of the economy's performance during the first quarter, when the annualized rate of growth slowed to a three-year low of 0.7%.

According to The Financial Times, there is now a 94% chance of a rate increase at the June meeting, according to Fed fund futures, up from 67% before this month's decision.

After a two-day meeting, the Federal Open Market Committee has opted to keep the federal funds interest rate as-is-a surprise to many, given the widely held assumption that not one, but two more rate hikes were on the agenda for 2017.

Despite the slow growth in the first quarter of this year, the Fed noted that "job gains were solid" and "the unemployment rate declined".

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Most economists have expressed optimism that the economy is strengthening in the current April-June quarter, fueled by job growth, higher consumer confidence and stock-market records. The markets initially expected the Fed to raise interest rates on Wednesday but have made a decision to hold due to the positive US employment data.

"If you look at how markets are positioned right now, it feels like hoping for the best but psychologically braced for a not so positive message (from the Fed)", said UBS Wealth Management analyst Geoffrey Yu, in London.

The Fed also said that inflation is "running close" to its 2 percent target, but that the measure that excludes volatile food and energy prices showed a pace "somewhat below" the target. Traders are awaiting U.S. non-farm payrolls for April, due out on Friday in the U.S. and expected to show the world's largest economy added 210,000 jobs last month, after a weaker-than-expected 98,000 in March.

The December 2016 hike was the central bank's first in a year, following a December 2015 hike that ended nearly a decade without rate increases.

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The Federal Reserve has voted not to raise its key interest rate today, following hikes in December and March.

Interest rates remain at historically low levels.

The Fed also is watching whether President Donald Trump can push through Congress his initiatives on tax cuts and federal spending, which Mr. Trump seeks to bolster economic growth.

The minutes of the Fed's March meeting, which were released April 5, indicated that policymakers believed the time had almost come to begin shrinking the central bank's bloated balance sheet, which would act as a monetary tightening. Both observations suggest the Fed remains on course to approve two more rate hikes this year. A deflationary drop of 0,2% is the sharpest since the first quarter of 2015.

More news: ADP: 177000 Jobs Added in April

The dollar steadied Tuesday as investors awaited new clues on the path for higher US interest rates. Most economists expect it to do so again when it next meets in mid-June.

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