Fed Holds On Rates, But Not For Long

An investor looks at an electronic board showing stock information at a brokerage house in Nanjing

Wednesday's announcement was not accompanied by a press conference with Fed chair Jay Powell nor were updated economic forecasts from the Fed released.

Mr Powell has endorsed a "patient" approach to rate rises, and the Fed's statement on Wednesday twice stressed that the central bank's inflation target is "symmetrical", in a sign that policymakers do not want to over-react to modest overshoots to their 2 per cent goal.

The FOMC also noted the weakness in growth in the first quarter, removing a reference in the in March statement that the economic outlook had "strengthened in recent months". However, there were some notable changes in the language of the statement.

The Federal Reserve left the base rate unchanged in the United States, but the central bank also stressed that prices are rising and expect inflation to move closer to its 2% target in the medium term.

And Fed participants have discussed tolerance for an overshoot on inflation, not that numbers are near its 2% target.

The Fed lifted its benchmark rate three times past year - while also beginning to slowly trim its balance sheet. Morgan Stanley Economist Ellen Zentner wrote in a research paper the Fed isn't anxious about an inflation overshoot just yet because inflationary pressures are not yet broad-based and "trend productivity plus inflation suggests the current pace of nominal wage growth is not inflationary". One exception is Goodfriend, who has favored changes pushed by conservatives to limit the Fed's flexibility in rate decisions.

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MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.5%, while South Korean stocks stumbled 0.7%. The yield on the 10-year Treasury was last seen at about 2.965% and the yield on the Treasury's 30-year long bond was 3.12%.

The policy divergence is shown in bond markets where spreads between German yields and equivalent US debt has blown out to its widest in three decades at 240 basis points. It raised rates once in 2016, but lifted borrowing costs three times last year amid a strengthening economy and labor market although that has started to fade this year with Friday night's jobs report a key indicator.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Risks to the economic outlook appear roughly balanced.

Many investors seem to get scared going into some Federal Reserve meetings, particularly when we are in a period of time where investors, consumers and business owners worry that the Federal Open Market Committee (FOMC) may keep raising interest rates too far or too fast.

Committee members acknowledged that both inflation and core PCE (personal consumption expenditures) are now in range of the 2% target. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and global developments.

The Fed removed the phrase that it is "monitoring inflation developments closely".

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