While the US Federal Reserve maintained its ‘wait’ and see’ stance on interest rates at this week’s two-day meeting in Washington, it revealed concerns about the slowing growth of inflation as it described the American economic activity and job gains as “solid”.
The central bank again emphasised its “patient’ approach with an on hold policy stance and kept the federal funds rate unchanged between a range of 2.25% and 2.50%.
In doing so it ignored (again) a call earlier this week from President Trump for the central bank to cut interest rates.
Wall Street didn’t move for a while – the Fed’s decision had been widely expected. But then the Dow turned down as did the S&P 500, followed by the Nasdaq.
The losses on Wall Street accelerated towards the end of the session with the Dow down triple digits and off 0.6%. The S&P 500 lost 0.7% and the Nasdaq fell 0.5% as well.
That was despite a 6% rise in the price of Apple shares after the release of its March quarter results the day before.
Gold fell 0.7% to $US1,277 an ounce and WTI oil dropped half a percent as well to around $US63.50.
The yield on 10-year treasury securities dipped to 2.45% from just under 2.48% shortly before the Fed statement was released at 4am Sydney time. Ten-year yields later bounced back over 2.51%.
That followed a technical interest rate cut by the Fed as it cut its interest rate on excess reserves to 2.35% from 2.40% in order to keep its fed funds rate well within the target range.
The Fed statement mentioned signs that inflation has weakened despite solid growth, as it again made clear its determination to be “patient” before moving interest rates again.
While the Fed declared that the economy is advancing at a “solid” rate overall, but it also noted that household spending and business investment slowed in the first quarter, and inflation is now “running below” its 2% target.
The slowing pace of price growth emerged as the main concern in the statement with the Fed noting what it termed the currently “muted” level of inflation, which continues to fall short of the Fed’s 2% target.
The statement suggested that a recent decline in inflation may be more persistent than expected, and was no longer to be blamed simply on weak energy prices.
The latest inflation figures (the Fed’s preferred Personal Consumption Expenditure report – so-called PCE inflation) in the first estimate of March quarter PDP growth showed core PCE inflation running at an annual 1.3% (down from 1.8% in the December quarter). In the month of March, it was 1.6% and has been falling since a peak of 2% in December.
Fed chair, Jerome Powell told a media conference the Fed is “strongly committed” to its 2% inflation target. He said the Fed’s policy is still appropriate, even
though core inflation has been softer than expected. He blamed “transitory factors.”
Mr. Powell mentioned financial services prices, apparel, and airfares. “There is reason to think that these will be transient,” just as a drop in cell phone prices in 2017 was. He would not be drawn on whether there was no room for a rate cut.
The GDP report showed that while headline growth was an annual 3.2% in the March quarter (it could be revised later this month) that was due to strong contributions from trade (exports with imports falling) and a build-up in unsold business stockpiles.
Growth in consumer spending, which accounts for more than two-thirds of US economic activity, slowed sharply to a 1.2% rate down from the 2.5% seen in the 4th quarter. It was the slowest rate of growth in consumer spending for a year.
Growth in real final sales to private domestic purchasers was only 1.3% versus 2.6% in the December quarter. That was another surprise and the slowest growth since 2012. Growth in business investment also slowed (a surprise) to a 2.7%, down from a 5.4% gain in the December quarter.
Besides the ‘muted inflation’ and the ’solid’ jobs growth, the Fed also singled out “global economic and financial developments” as a factor why it is maintaining a “patient” policy stance.
