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US Fed leaves rates unchanged, expects inflation to rise this year

02 February 2018

Janet Yellen's final FOMC meeting was a muted end to what turned out to be an innovative and in many ways surprising tenure for the chair.

The US economy is gaining momentum and unemployment has declined to 4.1%, or 17-year low, which has courageous central bankers in recent months.

The Fed, which raised rates three times previous year and forecasted in December three more hikes in 2018, confirmed on Wednesday it expected "further gradual" rate increases will be warranted. The TD Economics report is available here.

USA stocks rose slightly after the Fed statement before paring gains, while short-term interest rate futures showed traders adding slightly to bets the Fed would raise rates three times in 2018, beginning in March.

"The most important issue on the table right now is that we need to consider the possibility of a new economic normal that forces us to reevaluate our targets", Federal Reserve Bank of Philadelphia President Patrick Harker said in a January 5 speech.

Inflation on a 12-month basis is expected to move up this year and to stabilize around the Committee's 2 percent objective over the medium term. But its message on inflation signalled it was on track to raise the borrowing costs in March under incoming chief Jerome Powell.

"There was a subtle and distinct upgrade to the language around the expansion in the USA economy, with employment, household spending, and business fixed investment said to "have been solid", said Mr Greg McKenna, chief market strategist at CFD and foreign exchange provider AxiTrader.

Bond traders' wild ride in 2018 is about to kick into overdrive

On Wall Street, stocks overcame a brief stumble after the Fed announcement to close slightly higher on Wednesday, snapping a two-day losing streak.

After Yellen steps down this week, Powell's Fed will watch how quickly inflation speeds up.

The economy grew 2.3 percent a year ago.

Now the market has priced in three rate hikes for 2018.

"There was a little bit about inflation but nothing to rock the market too much", said Martin Rudings, senior dealer foreign exchange at OMF in Wellington. One of her colleagues will be her predecessor, former Chairman Ben Bernanke, who joined Brookings in 2014 when he stepped down from the Fed. She was also the first woman to lead the Fed, which was founded in 1913.

"Although many hoped that she'd get a second term as Fed chair, we at Brookings are very pleased to have her join our team", he said.

With Yellen's departure, the seven-member Fed board will have four vacancies. Trump has nominated economist Marvin Goodfriend for one of the other openings, but the Senate has yet to vote on him.

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US Fed leaves rates unchanged, expects inflation to rise this year