Fed keeps interest rates steady

Fed keeps interest rates steady

Fed keeps interest rates steady

"The labor market remains strong. economic activity rose at a solid rate" in recent weeks, the Fed said in a policy statement a day after President Donald Trump called on it to cut rates by a full percentage point and take other steps to stimulate the economy.

President Trump tweeted on Tuesday that the Fed "has incessantly lifted interest rates, even though inflation is very low" and should reduce them by 1 percentage point to help the USA economy "go up like a rocket".

The US dollar also turned around, rising 0.12 per cent against a basket of half a dozen developed market currencies.

"We don't discuss them and we don't consider them in making our decisions one way or the other", he said.

The Fed's emphasis on subdued inflation prompted knee-jerk buying of government debt as traders added to positioning for a rate cut. When asked by reporters about political influence, Federal Reserve Chairman Jerome Powell said the Fed is a "non-political institution".

With first-quarter earnings season winding down, investors are looking for fresh catalysts such as U.S. "It really has no implications for policy", said Powell.

The Fed may yet end up doing that.

Powell said in a press conference that while the Fed would be anxious if inflation ran persistently below its target, there was reason to believe that the recent weakness in price growth could prove to be transient.

The Fed, however, noted that economic activity "rose at a solid rate" during the first quarter.

That characterization followed a report this week showing consumer spending rebounded in March following a lackluster start to the year.

But data from both sides of the Atlantic, which suggested that signs of growth in the first quarter will not be sustained, limited the rise in yields.

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The economy expanded at a 3.2 per cent annualized pace from January to March, boosted by exports and inventories growth.

The two major centres are shut for holidays.

Even so, recurring low inflation spells, even if brought on by outside forces, poise a challenge for the Fed, which has been committed to raising inflation back to its 2% goal, said Ms. Coronado.

In Wednesday's meeting the Fed opted to hold rates steady at its target range of 2.25% to 2.5%, highlighting inflation that is "running below" its target.

On Wednesday, "we learned that an insurance cut is not imminent", said Julia Coronado, founder of MacroPolicy Perspectives LLC, a NY economics advisory firm. "Our baseline view remains that, with a strong job market and continued growth, inflation will return to 2 per cent over time and then be roughly symmetric around our longer-term objective".

But those expectations were crushed later on Wednesday when Fed chair Jerome Powell described the downturn in inflation as "transitory".

A rally in the price of US Treasuries fizzled as a result, with the 10-year yield flat at 2.504 per cent by the time the press conference wrapped up, having fallen as low as 2.455 per cent earlier. "That's the part that's likely to sound hawkish to a market that is expecting rate cuts".

This was the third such adjustment in a year for interest on excess reserves, or IOER.

Sentiment was shaken somewhat by the Fed, which left its benchmark interest rate — which determines the cost of borrowing for individuals and businesses — in a range of 2.25% to 2.5% as expected on Wednesday.

Asia trading had been thinned by holidays in Japan and China but Hong Kong and Korea's stocks gained after CNBC reported the USA and China could announce a long-awaited trade deal by May 10, as Chinese Vice Premier Liu He heads to Washington.

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