Steady Fed Downplays Transitory Weakness

The Federal Reserve opted to keep interest rates steady on Wednesday, while giving signals more rate rises are coming.

The U.S. economy grew a meager 0.7% at an annual rate in the first quarter.

Despite signaling that further rate hikes are still on tap for the remainder of the year, the FOMC held the Fed Funds Rate in the United States steady at a range of 0.75% to 1% in a unanimous vote.

"The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal", the central bank said in a statement.

The labor market continued to strengthen even as growth in economic activity slowed and "the fundamentals underpinning the continued growth of consumption remained solid", policymakers added.

Earlier in the day, the dollar was little impacted by a report from the ADP employment institute that is seen as a barometer for the jobs report, though the greenback posted slight gains after the ISM non-manufacturing index rose more than expected. It suggests that the trend of improving growth is likely still intact and as a result it means that we'll probably see a Fed rate hike in June and probably again in September.

Fed Vice Chair Stanley Fischer said last month that the central bank remained on track for two more rate increases this year despite the recent weak economic data.

The Federal Reserve said economic growth slowed over the last six weeks as inflation stayed low and spending didn't increase much. Before the meeting, Fed fund futures reckoned there's a 67% chance of a rate hike in June, down from 72% a week ago. The euro declined against the USA dollar on Wednesday as the dollar firmed across the board after the Federal Reserve signalled it was still on track for two more interest rate hikes this year.

Curt Long, Chief Economist for the National Association of Federally-insured Credit Unions, agreed that the FOMC's decision wasn't all that surprising. The Fed waved off a slowdown in first-quarter growth as "transitory", leaving the door open for a possible rate hike in June. The administration has moved quickly to slash regulations on business, but efforts like tax cuts and infrastructure spending have proved more hard.

It isn't just the Fed's short-term rate — a benchmark for other borrowing costs throughout the economy — that likely occupied attention at this week's meeting.

Notable changes from previous statements indicated that Fed officials thought that "economic activity slowed" while "household spending rose only modestly".

The Fed's beige book survey of the economy prepared in advance of this week's meeting noted reports across the country of firms that had to provide bonuses, and increase wages and benefits, while still struggling to fill openings, even for low-skilled work.

Trump had been highly critical of Yellen during the campaign, accusing her of keeping interest rates low to benefit the Obama administration - charges Yellen fervently denied.

  • Zachary Reyes