Fed holds interest rates steady, downplays economic weakness

The Federal Reserve has left interest rates unchanged while signaling that it expects a resilient USA economy and solid job market to justify further rate hikes later this year.

In a statement released at the end of a two-day meeting, the Fed acknowledged that the recent soft U.S. economic data was transitory, and they maintained a wait and see approach. The U.S. central bank, downplayed weak first-quarter economic growth and emphasized the strength of the labor market, in a sign it could tighten monetary policy as early as June.

The decision to hold its benchmark interest rate target at 0.75 percent to 1 percent was widely expected with the Federal Open Market Committee voting unanimously on the issue.

The Fed has only raised interest rates three times in the last decade, most recently in March this year.

In its release, the Fed mentioned that consumer prices, excluding energy and food, declined in March, as inflation continued to run somewhat below the central bank's 2 percent target.

The Fed's statement reiterated it expects to nudge up rates "gradually" and that risks to its economic outlook "appear roughly balanced".

This is really important because the Fed views both core inflation and inflation expectations, especially market-based ones, as particularly good predictors of future inflation. Many think that annualized growth could accelerate to around 3 percent and that the Fed will soon feel confident to resume raising rates. The unemployment rate, however, fell to 4.5 percent - marking its lowest level in 10 years.

In other news, Russian Federation said that as of May 1, it had curbed output by more than 300,000 bpd since October. The decision by the FOMC was anticipated by the equity and bond markets.

"The statement makes it very clear that the Fed does not take the reported slowdown in first-quarter growth seriously", Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd, wrote in an email to clients.

The odds of a rate rise at the committee's next meeting in June rose to 75 per cent after the announcement from 70 per cent on Tuesday, the FedWatch tool from... The central bank has signaled two more rate increases are likely this year.

Gold fell to a one-month low as the dollar firmed on Wednesday after the U.S. Federal Reserve kept interest rates unchanged as expected and the market reduced expectations of a surprise win by France's far-right presidential candidate.

Policymakers are awaiting clarity on the size and scope of the tax cuts, infrastructure spending and regulatory changes that the Trump administration will be able to push through Congress. Wednesday's statement offered no new details. The Fed's language choices diminish the importance of the recent weakness and, in our opinion, mean investors should be prepared for another rate increase in June.

  • Zachary Reyes