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August, 2018 3:20 PM



Federal Reserve leaves key interest rate unchanged, notes rising inflation

Federal Reserve leaves key interest rate unchanged, notes rising inflation

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

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03.05.2018 09:06 AM

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

The Federal Reserve noted inflation had moved up but said its two percent 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 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 price index hit the central bank's two-percent 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 percent.

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.

But the FOMC statement said the headline and core PCE inflation measures had "moved close" to the two percent 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.

'Symmetric' objective

But the FOMC said that "inflation on a 12-month basis is expected to run near the committee's symmetric two percent 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 scrutinize every nuance for signals of their policy intentions.

Markets also have been looking for signs new Federal Reserve Chairman Jerome Powell will be more hawkish, or aggressive, in fighting the buildup of inflation compared to his predecessor Janet Yellen. 

But analysts said this statement was a signal instead that the Fed is unlikely to overreact.

US stocks rallied modestly just after the Fed statement but pulled back soon after that. All three major indices finished lower for the day.

The dollar fell sharply against 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."

"Indeed, the Fed's use of the word 'symmetric' in describing its 2% price target suggests a willingness to allow inflation to run a bit hot."

And 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 percent."

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 labor market conditions will remain strong."

It also 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 two percent.

That meeting will be one of the four each year in which 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 starting tightening policy in December 2015.

The meeting also will provide the latest quarterly forecasts from all the Fed board members and regional bank presidents, which will include the key prediction of the number of rate hikes expected this year.

The median estimate in the March report indicated three increases this year, but RDQ Economics said the forecasts should "show four rather than three rate hikes in total for 2018."
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