Fed Notes Resurgent US Inflation, Leaves Key Rate Unchanged

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But Fed policymakers were almost evenly divided in March on whether they anticipated three more hikes this year as the economy has continued to improve and inflation is moving up.

While the officials acknowledged the recent increase in inflation, they suggested that the Fed was not overwhelmingly concerned about it. The Fed's preferred "core" inflation measure, known as PCE, which filters out volatile food and fuel prices, was within spitting distance of the Fed's 2 percent target in March.

"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.

On growth, they remained pretty much optimistic...

The Fed's confidence in the economic outlook was underlined by its assertion that business fixed investment had continued to grow strongly.

While the broader markets came under pressure, Apple (AAPL) held on to a strong gain after the tech giant reported fiscal second quarter results that beat analyst estimates on both the top and bottom lines. Higher interest rates would help tamp down inflation but also could slow economic growth. However, the key question is about the number of rate hikes.

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The US dollar fell from 2018 highs set earlier in the day after the Fed statement raised concerns that monetary accommodation will stay loose even as the central bank hikes rates.

"I'd call what the market is doing a sigh of relief because we didn't get an unexpected hike", said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas.

Currently, the futures market assigns 45 percent odds of three more quarter-point rate hikes before the end of the year, and that's something that hasn't been fully priced into stocks and bonds.

The negative mood carried over from the Asian trading session, where shares slipped as hopes waned for real progress in Sino-US trade talks, following reports the Trump administration is considering executive action to restrict some Chinese companies' ability to sell telecoms equipment in the United States.

The dollar index rose 0.3 percent, with the euro up 0.02 percent to $1.1952.

But a string of ominously weak data is causing speculation that the European Central Bank may have to delay closing its bond buying programme from September. It downplayed a recent slowdown in economic and job growth, saying the activity had been expanding at a moderate rate and job gains, on average, had been strong in recent months. The Institute for Supply Management (ISM) survey published on Tuesday showed US factory activity slowed in April, but it highlighted shortages of skilled workers and rising costs, suggesting inflationary pressure is building. In the near term, we believe the positive push on account of the rise inflation and interest rate expectations could help the dollar to some degree. Moreover, in the second half of the year, twin deficit worries are likely to come back alongside the volatility related to mid-term elections in the U.S., and the likely pickup in growth momentum for the euro zone, essentially pulling the dollar down, again.

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