Fed Stands Pat, Mum On June Rate Hike

Gauging the Fed’s Move

We have seen the British Pound suffer a nosedive following BoE Governor Mark Carney once again backtracking from his previous upbeat tone on higher United Kingdom interest rates, and this has provided a reminder that interest rate differentials between the Federal Reserve and other developed central banks can still drive traders towards the US Dollar.

In maintaining the federal funds rate in the range of 1.5-1.75%, the committee stressed its inflation target is "symmetric".

"The real headache is that it is easy to be the Fed when inflation is below target. a very important aspect as we go into this May meeting, is the tone of the debate changes completely as we get to 2 percent and beyond", said Torsten Slok, an economist at Deutsche Bank.

Some other central banks, notably those in Switzerland and Sweden, have also turned more dovish, with the latter suggesting this week that more "tools" may be deployed to lift inflation.

The Fed's latest "dot plot" now forecasts another two rate rises this year, although some analysts see three increases as possible.

A growing number of Fed officials are projecting the bank to hike rates three more times in 2018.

The Fed raised rates in March and now forecasts another two increases this year. 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.

"Raising rates too slowly would make it necessary for monetary policy to tighten abruptly down the road, which could jeopardize the economic expansion", Fed Chairman Jerome Powell said in a speech last month.

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Many on Wall Street think the economy is accelerating so quickly that the Fed will have to hike rates three more times in 2018 to keep the economy from overheating.

"What we're faced with here is a continuation of a strong economy, strong earnings and inflation creep that's spooking the market on the fixed income side overall the last several months", Chad Morganlander, a portfolio manager at Washington Crossing Advisors, said by phone.

December's Republican-led tax cuts, coupled with higher limits on public spending this spring, will probably bolster growth going into the second quarter of the year. The Fed has been predicting inflation would pick up for several months after it unexpectedly fell in the latter half of 2017.

Labor markets remain tight.

The data came after the Federal Reserve was also seen as adopting a more dovish tone at the conclusion of its meeting on Wednesday. This is at its highest level in years and broadly consistent with a 2% inflation goal.

And so in making this change, Fed officials are acknowledging that inflation is getting closer to its target.

The Stoxx Europe 600 Index declined 0.7 percent, the largest drop in a week. In the European Union the pattern is expected to be similar, but a tad higher, with 1.7% this year, 1.8% next.

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