Fed leaves interest rates under 1.75 percent following May meeting

Randal Sanchez
May 4, 2018

The Fed's announcement assuaged investors' concerns about the possibility of accelerated interest-rate increases as rising materials costs for companies have signaled a pickup in inflation.

Although the Fed confirms it will probably lift interest rates soon, following its two-day meeting, that won't be until June.

The Fed dropped language in previous post-meeting statements that said they were closely monitoring inflation. The policy statement noted both overall and core inflation have moved close to 2 percent. It also means the Fed would be comfortable with allowing inflation to run above 2%, since it's not a ceiling.

Sluggish inflation stood in the way of quicker rate rises past year, but headline inflation has recently returned to the Fed's target of 2 per cent, leaving policymakers better placed to forge ahead with their rate-lifting plans.

The Fed's decision to leave its benchmark overnight lending rate in a target range of between 1.50 percent and 1.75 percent was unanimous. So-called core prices, which exclude the volatile food and energy sectors, rose 1.9% in March, up from 1.6% in February.

Equally, MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.5 percent, while South Korean stocks tumbled 0.7 percent. US Treasury yields for most maturities fell. The last time we saw unemployment of 4% was during technological bubble at end of decade of years 1990. The Fed's comments on the US labor market were also of interest.

Similarly, sterling seemed to have left behind its Brexit-related worries due to expectations of two interest rate rises this year by the Bank of England.

Several bond market pros who had expected four rate hikes said the statement did not change their view.

Key US inflation measure hits Fed's 2% annual target

The Fed also said it sees that household spending moderated from a strong fourth-quarter pace, but it said business fixed investment continued to grow strongly.

On Monday, the Commerce Department reported that inflation using the Fed's preferred measure reached 2 percent for the 12-month period ended March 31. While the initial reaction to the statement resulted in a lower U.S. dollar, the dollar looks destined to keep strengthening as inflation continues to accelerate.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Now, "inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term".

In maintaining the federal funds rate in the range of 1.5-1.75%, the committee stressed its inflation target is "symmetric". The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation. National data already indicated that expectations for a steady headline rate in April would turn out to be too optimistic.

The US Federal Reserve has kept interest rates unchanged, but hinted that more rate hikes are likely coming later this year if the economy continues to strengthen.

"There are some changes in the statement to reflect the evolution of the data especially in their inflation outlook", said Stephen Stanley, chief economist at Amherst Pierpont Securities in Stamford, Connecticut.

Myles Udland is a writer at Yahoo Finance.

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