Federal Reserve keeps interest rates steady -- June hike likely

Cornelia Mascio
Mag 6, 2017

The Federal Reserve left interest rates on hold as expected after its May meeting, but it dropped one key hint that another rate hike is likely in June barring a considerably softer outlook for economic growth: the word "transitory".

The dollar rose by as much as 0.7 percent against the yen, and hit 112.69 yen, the highest level since March 21, as the Fed statement solidified expectations for a rate hike in June and another in the second half of the year.

FED IN FOCUS: U.S. interest rates remained unchanged after the latest policy meeting by the Federal Reserve, which also said it expects the U.S. economy, the world's biggest, to start growing at a faster pace. The markets initially expected the Fed to raise interest rates on Wednesday but have made a decision to hold due to the positive USA employment data. In their post-meeting statement today, the central bank policymakers provided little guidance on when their next rate hike might come.

If his stimulus plans become reality, the Fed likely would speed up the tempo of rate increases because inflation could increase and the economy would be better able to withstand higher borrowing costs. Eastern time. The moves might have reflected the Fed's dual message that while now isn't the time to resume raising rates, the economy remains durable enough to withstand further hikes soon. The Fed's hawkish tone all but dismissed weak first-quarter data in which the economy grew at only 0.7 percent, which the Fed acknowledged in its statement.

But Fed played down the significance of weak consumer spending, saying "the fundamentals underpinning the continued growth of consumption remain solid".

The U.S. dollar index, which measures the greenback's strength against a trade-weighted basket of six major currencies, was down 0.3% to 98.96 as the stronger euro weighed.

"The Fed is doing a very good job of pre-warning the markets under Yellen and they will have to talk up the growth prospects and show that the Q1 (first quarter GDP) number was indeed transitory". There was a 1.2% growth in jobs in Q1 from the prior quarter after 29,000 new positions were created. Before 2015, it hadn't raised rates in almost a decade as it tried to goose up the weak housing market with 0% interest rates.

The rate-setting committee is also gearing up to announce sometime this year when and how the Fed will begin shrinking its $4.5 trillion balance sheet. But she and at least five other Fed officials are scheduled to speak on Friday, giving policy makers a chance to explain their decision more fully.

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