Published: Thu, May 11, 2017
Business | By Patricia Jimenez

Fed set to leave interest rates unchanged, may hint at June hike

The dollar endured a very volatile session on Thursday (4 May), after the Federal Reserve opted to keep interest rates unchanged the previous day, as widely expected by economists.

USA consumer spending was unchanged in March for a second straight month and a key inflation measure recorded its first monthly drop since 2001, but economists still expect an interest rate increase in June as the labor market tightens.

The FOMC raised the federal funds interest rate in March from 0.75 to 1 percent.

"The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal", the central bank said in a statement.

Investors next foresee an interest rate rise in June, according to Fed futures data compiled by the CME Group. It was the poorest quarterly performance in three years.

"Nothing in the statement today, which was voted unanimously by the FOMC, leads me to believe that the Fed is even close to changing its mind on rates", Roberto Perli, a partner at Cornerstone Macro LLC in Washington, wrote in a note to clients.

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The statement explaining the decision seems to strengthen the prospect of two more increases this year, likely at the June and September meetings. While the rate of economic growth leaves much to be desired, at 0.7% annual pace in the first quarter, unemployment hit a 10-year low, at 4.5%.

Neil Wilson, senior markets analyst at ETX Capital, said: "If the Fed really is to hike in June, and market pricing suggests it is, we can expect various Fed officials to get wheeled out over the coming weeks to start talking up the prospect in order to smooth the path for the hike".

"If you look at how markets are positioned right now, it feels like hoping for the best but psychologically braced for a not so positive message (from the Fed)", said UBS Wealth Management analyst Geoffrey Yu, in London.

Though some temporary factors probably held back growth last quarter and may have overstated the weakness, the poor showing underscored that key pockets of the economy - consumer spending and manufacturing, for example - remain sluggish.

The Fed reiterated its view that monetary policy remains accommodative to support both an uptick in labour market conditions and a sustained return to 2% inflation. "The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run". Fed Chair Janet Yellen doesn't have a press conference scheduled after this meeting, but she and at least five other Fed officials are scheduled to speak on Friday, giving policy makers a chance to explain their decision more fully if they so choose.

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