May 26, 2018

US Federal Reserve holds interest rates, walks tightrope

03 May 2018, 02:14 | Lionel James

US Federal Reserve holds interest rates, walks tightrope

Dollar turns positive for 2018 U.S. stocks fall

The initial estimate for the quarter represented a slowdown from growth averaging more than 3% during the last nine months of 2017.

Stocks, which initially gained after the Fed statement, reversed course as potential USA restrictions on Chinese telecommunications companies reinforced investor concerns about trade relations between the United States and China. As for other asset classes, gold extended gains, the dollar fell and oil rose slightly. Further, two-year Treasury yields have climbed more than 10-year yields, and the flatter yield curve pinches net interest margins for the likes of JPMorgan Chase (JPM) and Bank of America (BAC).

Here are the key takeaways from the policy meet of the Federal Open Market Committee. The committee said that the committee would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.

The Fed noted that consumer prices rose 2 percent in March year-over-year.

"In view of realized and expected labour market conditions and inflation, the Committee made a decision to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 per cent".

"The FOMC didn't shift the dial on the policy outlook a great deal this morning, so our view remains unchanged in that we expect a more thorough test below 70 cents to eventuate in the near-term", said Miles Workman, an economist at ANZ Bank New Zealand, in a note.

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The Fed kept interest rates unchanged, as was mostly predictable. But interest rates are still at a very low level compared to where they were during much of the 1990s and early 2000s, when interest rates over 4 per cent were common.

"Recent data suggest that growth of household spending moderated from its strong fourth-quarter pace while business fixed investment continued to grow strongly", the Fed added.

Commodity-linked currencies like the Canadian CAD= and Australian AUD= dollars gained sharply, with the latter rising 0.4 percent to $0.7523 cents after data showing a better-than-expected jump in the country's trade surplus for March.

Those who voted were Jerome Powell, Chairman; William Dudley, Vice-Chairman; Thomas Barkin; Raphael Bostic; Lael Brainard; Loretta Mester; Randal Quarles and John Williams.

The Fed statement was not quite as hawkish as some had wagered on and caused a dip in the dollar, though sentiment remained bullish given US rates were still clearly heading higher while those in Europe and Japan lagged far behind.

"It's hard to see investors willing to take increasing risk ahead of a couple more weeks of trade discussions and negotiations to come", said Matthew Miskin, market strategist at John Hancock Investments in Boston.

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