Monday, 20 August, 2018

US Fed keeps interest rates unchanged as inflation remains close to target

Federal Reserve The Federal Reserve said inflation was close to its target of 2pc Credit KAREN BLEIER AFP
Cristina Norman | 04 May, 2018, 14:18

The price of silver climbed after the Federal Open Market Committee made dovish comments regarding interest rates and inflation. "The market is still a bit too long euros and remains vulnerable", she said. As expected, the Fed kept monetary policy unchanged but signaled its intention to raise rates later this year thanks to underlying strength in the USA economy.

The central bank meeting, second chaired by Jerome Powell, coincides at a time when Wall Street doesn't know very well what it wants.

The revival of the US currency after more than a year on the wane is already causing mayhem in emerging markets from Turkey to Argentina and Indonesia, while tightening global financial conditions in a way that could eventually make even the Fed consider a pause for thought. But unlike in their March statement, Fed officials this time didn't also say that the economic outlook had strengthened in recent months.

"Recent data suggest that growth of household spending moderated from its strong fourth-quarter pace while business fixed investment continued to grow strongly", the Fed added. But most economists expect a solid rebound, with the economy expanding at a 3 percent annual rate or better, in the current April-June quarter. External factors like demand for the Dollar is dictating the majority of swings in the global currency markets, explaining why the Dollar unexpectedly making a turnaround over the previous fortnight has resulted in the Rand moving back to levels not seen since December 2017. Most foresee either two or three additional increases in the Fed's benchmark rate by year's end, coming after an earlier hike in January. If economy marches more vigorously than anticipated, Fed might be forced to raise rates faster and y don't like it. Some analysts think the Fed may signal then that it foresees four hikes for 2018, up from the three it predicted in March.

Powell, Chairman of the Federal Reserve.

The Fed's latest "dot plot" now forecasts another two rate rises this year, although some analysts see three increases as possible. Compare that to 30 percent odds of this happening just one month ago.

In its statement, the Fed expressed confidence that a recent rise in inflation to near the USA central bank's target would be sustained, leaving it on track to raise borrowing costs in June.

Fed policymakers have raised concerns that rising inflation is a sign the economy could start overheating, particularly after the stimulus of the recently enacted tax cuts. Thus, the Indonesian rupiah is weakening and is gradually approaching the psychological IDR 14,000 per U.S. dollar level.

He said the fed funds futures indicated 2.3 quarter-point rate hikes this year and after the Fed statement, the futures were barely changed.

"Rising inflation expectations, an overall bullish commodity trend (late-cycle preference for commodities), geopolitical and financial risks are being offset by a rising dollar and rising real-rates", Saxo Bank analysts said in a note.

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