Published: Sat, May 05, 2018
Money | By Michele Stevens

Fed calm over 2% inflation shows hikes will be gradual

Fed calm over 2% inflation shows hikes will be gradual

The Fed policy meeting ended with no change, as expected, while the central bank expressed confidence a recent rise in inflation to near target would be sustained, leaving it on track to raise borrowing costs in June. For those expecting a hawkish Fed, the statement disappointed and thus moderated expectations for any aggressive turn in the interest rate cycle.

The Fed added that it would treat its inflation target as symmetrical, in that the monetary policymakers would allow an overshoot for a time, winking at a status quo pace of rate hikes despite growing inflationary pressure.

The official statement read: "Inflation on a 12-month basis is expected to run near the Committee's symmetric 2 per cent objective over the medium term".

The Federal Open Market Committee held the fed funds rate target at a range of 1.5% to 1.75%. The Fed acknowledged this in its latest statement, noting that "both overall inflation and inflation for items other than food and energy have moved close to 2 percent". The job growth came from across industries, with the high-skilled professional and business services industry accounting for more than half of all jobs added. The Fed also believes that the risks to economic outlook appear roughly balanced. Depending on the results of the report, precious metals may lose Thursday's gains as they did following the last jobs report in March.

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The Fed could be inclined to hold off on further rate hikes and let the economy use cheaper capital to rebalance.

The idea is that the Fed is willing to endure temporary periods when prices may rise faster than 2%, just as it had been willing to endure periods when prices rose slower than its longer-run goal. "The minutes should be more interesting because the Fed is entering challenging territory with policy still accommodative but targets likely to be soon achieved or surpassed".

The New Zealand dollar fell to its lowest level in more than four months as further signs of a robust United States jobs market stoked expectations that the Federal Reserve will raise interest rates again next month.

The Dow Jones Industrial Average slipped 31 points, or 0.1%, to 24068.

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

The Commission's spring economic forecast seemed to gloss over the latest weakness in survey indicators and sees ongoing expansion while admitting new risks. In the near term, the recent weak economic data readings in Europe could keep the pressure on the Euro and the GBP - with expectations of tighter monetary policy moderating.

The euro was last at $1.1972 having hit a 15-week trough at $1.1936 on Wednesday, uncomfortably close to the low for the year at $1.1915.

Ahead of this week's meeting, Powell has stuck to flagging a middle-of-the-road approach on rate increases in the face of data showing the robust economy had not yet triggered a jump in inflation. If the Dollar did encounter another reversal and suffer from investors taking profit, it would be seen as encouraging for the Rand.

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