Fed holds rates, suggests low gradual increases

After the Fed hiked interest rates in December for the first time in more than a decade, there had been widespread speculation that it would pull the trigger again in March.

Risk appetite was also subdued as crude oil prices resumed falling and ahead of the closely-watched Fed policy meeting outcome later in the day.

While Wednesday’s statement leaned towards the dovish side, if the Fed wanted to stick to its original forecast of four rate hikes in 2016, it still has the means to do so.

The Federal Reserve left its key interest rate unchanged on Wednesday after the first monetary policy meeting of 2016.

He says: “The combination of sinking stock markets, sagging sentiment among manufacturers and signs of distress in the junk bond market means the market may soon be demanding the U.S. central bank reduces borrowing costs instead of hiking them”.

While the statement was interpreted to mean the Fed was cautious on raising rates further, expectations for a dovish statement had been high going into the meeting.

Uncertainty over the future path of US interest rates weighed on European stocks on Thursday, while the dollar edged a touch lower against the euro.

Some economists expected the Fed to more clearly voice concerns that the Global and market developments could crimp the USA economy, a view it expressed in September when China’s stumbles similarly rocked markets.

While the major US averages fell 1-2 percent overnight in a knee-jerk reaction to the Fed’s policy statement, stock futures pointed to strong gains at the open later in the day.

But the Fed knows that even with a 0.25 percent hike, it’s pressing its luck given the extensive reliance of the current global economy on easy money.

Still to come on the data front, Eurozone consumer confidence is at 1000 GMT.

While acknowledging that low inflation levels – blamed on low oil prices, which it said were “transitory” – were concerning, the FOMC statement indicated that interest rates would remain as is, with monetary policy remaining accomodative.

In the United States, initial jobless claims and durable goods orders are at 1330 GMT, while pending home sales are at 1500 GMT. The Fed’s preferred inflation gauge, an index of personal consumption expenditures excluding food and energy, climbed by 1.3 percent during the 12 months through November, the most recent available data.

The economy’s growth, as measured by the gross domestic product, has lagged, with many analysts suggesting that it slowed to a sluggish annual rate below 1% in the October-December quarter. There was no indication of the next rise, but with the labour market and inflation expected to continue its strength, another slight raise will be expected shortly. “Household spending and business fixed investment have been increasing at moderate rates in recent months, and the housing sector has improved further; however, net exports have been soft and inventory investment slowed”, the FOMC statement said.