US Fed holds interest rate steady but points to higher inflation

The US Federal Reserve's policy-making Federal Open Market Committee reaffirmed that it expected to continue on a path of "further gradual increases" in the benchmark lending rate.
The US Federal Reserve's policy-making Federal Open Market Committee reaffirmed that it expected to continue on a path of "further gradual increases" in the benchmark lending rate.PHOTO: AGENCE FRANCE-PRESSE

WASHINGTON • The US central bank kept its key interest rate unchanged as expected on Wednesday and, at the same time, signalled that policymakers were not overly concerned by the recent uptick in inflation.

The Federal Reserve noted inflation had moved up but said its 2 per cent target was "symmetric", indicating there was margin to fluctuate above or below that level.

At the conclusion of its two-day meeting, the Fed's policy-setting Federal Open Market Committee (FOMC) also reaffirmed that it expected to continue on a path of "further gradual increases" in the benchmark lending rate, which it last hiked in March.

The Fed's preferred Personal Consumption Expenditures (PCE) price index hit the central bank's 2 per cent target in March for the first time in nearly a year, while "core" PCE inflation, which excludes volatile food and energy prices, was 1.9 per cent.

Inflation had remained stubbornly low during 2017, due largely to temporary factors like low mobile phone plan prices, which baffled officials who expected the very strong pace of hiring would pressure wages and push prices higher.

However, the FOMC statement said the headline and core PCE inflation measures had "moved close" to the 2 per cent goal since the last meeting.

And the uptick has jarred financial markets, which fear the Fed will have to raise rates at a faster pace, possibly three more times this year, rather than the two increases previously expected.

But the FOMC said that "inflation on a 12-month basis is expected to run near the committee's symmetric 2 per cent objective over the medium term".

That seemingly minor change, with the addition of the word "symmetric", is certain to receive a lot of attention from the economists who scrutinise every nuance for signals of its policy intentions.

Markets also have been looking for signs that new Fed chairman Jerome Powell will be more hawkish in fighting the buildup of inflation compared with his predecessor Janet Yellen. But analysts said this statement was a signal instead that the Fed is unlikely to overreact.

The US dollar fell sharply against a basket of other currencies but quickly reversed course, rising to a new high for the year.

Analyst Omer Esiner of Commonwealth Foreign Exchange said "the Fed showed no signs that it plans on speeding up its pace of monetary policy tightening".

RDQ Economics said the wording changes looked like "a signal that the Fed is not likely to react in a hawkish manner to inflation moving above 2 per cent".

The Fed statement also repeated that even "with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labour market conditions will remain strong". It again described the risks to the economic outlook as roughly balanced.

The FOMC next meets in June, when it is widely expected to raise the key rate by 25 basis points to 2 per cent.

That meeting will be one of the four each year in which Mr Powell will hold a press conference, which will allow him to explain the reasoning behind any move. The quarterly meetings have been the only ones to feature rate changes since the Fed first started tightening policy in December 2015.

AGENCE FRANCE-PRESSE

A version of this article appeared in the print edition of The Straits Times on May 04, 2018, with the headline 'US Fed holds interest rate steady but points to higher inflation'. Print Edition | Subscribe