As forecast the US Federal Reserve sat on its hands at its two day meeting in Washington, but sent hints that rates will rise again in coming months.
It held short-term rates unchanged at 1.5% to 1.75%, but that will change, soon, probably at the Fed’s meeting in mid-June.
The Fed signalled it is more confident that US inflation will remain around the central bank’s 2% target range after undershooting that level for much of the last six years.The US central bank said in the statement that price growth has moved close to its target and is likely to stay there in the medium term.
US investors fretted about the acknowledgement of rising inflation. Wall Street briefly rose into positive territory after the statement was released, then fell as investors noted the comments on inflation. The Dow ad the S&p 500 both closed down around 0.7%, Nasdaq was off around 0.4%
Gold rose, then fell into the red in after hours trading and oil edged higher and the Aussie dollar traded at just over 75 US cents.
The Fed dropped language in previous post-meeting statements that said they were closely monitoring inflation. “Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 per cent objective over the medium term,” officials said, adding that the risks to the outlook were “roughly balanced”.
“On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2%,” the statement said. “Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term.” the Fed’s statement said.
On Monday the government reported that inflation as measured by the Fed’s preferred PCE price index rose to a 12-month rate of 2% for the first time in a year. Just a few 2 years ago the yearly rate was nearly zero.
The Fed’s confidence in the economic outlook was underlined by its assertion that business fixed investment had continued to grow strongly. It added that risks to the outlook appear roughly balanced, removing a previous reference to “near-term risks.”
The Fed’s latest ‘dot plot’ currently forecasts another two rate rises this year, although some analysts see three increases as possible. Investors overwhelmingly expect a rate hike at the Fed’s June 12-13 policy meeting.
The pace of rate increases has picked up since the central bank began its tightening cycle in December 2015. It raised rates once in 2016, but lifted borrowing costs three times last year amid a strengthening economy and labor market although that has started to fade this year with Friday night’s jobs report a key indicator.
If there is another weak month with around 100,000 jobs created (as in March when just 103,000 were reported) then the odds for three rate rises in 2018 will fall.
