Fed holds interest rates steady

Owen Stevens
May 12, 2017

US consumer spending was unchanged in March for a second straight month while a measure of inflation fell for the first time in more than a year, but some economists see the weakness as only temporary.

Central bank officials said a sharp slowdown in the pace of economic growth in the first quarter "was likely to be transitory" and that the fundamentals underpinning continued growth in consumer spending "remained solid" despite a first-quarter performance that was the worst in seven years.

GDP grew at an annual rate of 0.7% in the first quarter - the slowest rate since the first quarter of 2014.

The U.S. Federal Reserve voted to leave its benchmark interest rate unchanged on Wednesday while expressing concern with the pace of economic growth.

In a statement released at the end of a two-day meeting, the Fed acknowledged that the recent soft United States economic data was transitory, and they maintained a wait and see approach.

"Last night the Fed rate decision was nearly exactly as expected with a slight hint towards hawkishness", Standard Bank trader Warrick Butler said.

The US Federal Reserve reports a downturn on inflation, calling into doubt the policy of raising interest rates more rapidly.

"In view of realized and expected labor market conditions and inflation, the Committee chose to maintain the target range for the federal funds rate at 3/4 to 1%".

The core PCE is the Fed's preferred inflation measure and is below the central bank's 2 per cent target.

President Donald Trump entered office in January on a pro-growth platform that has since stalled in Congress. Administration officials have expressed hope to get tax cuts approved before the end of the year, but no infrastructure spending program has been put forth.

Regarding the labor markets, the central bank focused on the decline in the unemployment rate and was content with the average job gains increase despite last month's headline increase falling short of expectations.

In short, they have not changed their view that the economy can take a "gradual" increase in rates, which will be needed to prevent an overshoot of the inflation target as the labour market tightens.

Bloomberg's World Interest Rate Probability data suggests a 93.8% chance the Fed will raise rates in June.

Meanwhile, 10-year Treasury yields rose close to 2.34% from around 2.30% late Wednesday.

Policymakers are also gearing up to announce sometime this year when and how the Fed will begin shrinking its $4.5 trillion balance sheet, according to minutes from the March meeting.

Other reports by VgToday

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