Federal Reserve Holds Steady, Signals Higher Inflation

How it opts to describe price pressures will shape expectations for the pace of future rate increases.

The U.S. central bank is due to announce its decision at 2 p.m. EDT on Wednesday. As expected ahead of time, there was no rate hike by the FOMC. And then in February, it approved $300 billion more in government spending for this year and next year. For years, the Fed has determined monetary policy based partly on the inflation level. The policy band was expected to be around 3.25-3.5%, while the “longer run” estimate of the Fed’s target was around 3.5%. “There are shades of gray” in their portrayal.

The US Federal Reserve has kept interest rates unchanged, but hinted that more rate hikes are likely coming later this year if the economy continues to strengthen. No fresh forecasts will be released this week and nor will the meeting be followed by a press conference with Chairman Jerome Powell.

Oil prices were stable on Wednesday, supported by concerns that the United States may re-impose sanctions on major exporter Iran, although soaring US supplies capped gains.

Committee members acknowledged that both inflation and core PCE (personal consumption expenditures) are now in range of the 2% target.

After years of rising more slowly than the Fed would have liked, inflation is now in line with the central bank’s goal. “Some such language allows for a small overshoot which seems likely”. The Fed’s forecasts published in September 2016 revealed that policymakers thought USA short-term interest rates would be below 2% by the end of 2018 and below 2.75% by the end of 2019.

Analysts expect growth to pick up in the second quarter and Fed policymakers estimated in March that the economy would expand 2.7 percent this year. That is even while there is strong growth in hiring and in investment.

The question remains how quickly and high Jay Powell, the Fed chairman, and his colleagues boost borrowing costs as they attempt to prevent the United States from overheating while keeping the economy moving at a steady pace. The jobless rate is close to 4 percent – below the level the Fed considers full employment. That was an upgrade from the March meeting in which the FOMC said the indicators “have continued to run below 2 percent”.

Traders of US short-term interest-rate futures on Wednesday kept bets the Federal Reserve will raise rates at least two more times this year after Fed policymakers ended a two-day meeting with no rate hike but on track for one in June. That burden, together with a fading boost from the fiscal stimulus and higher interest rates, may make 2020 a turning point for the economy. “This week will probably just be about buying time”. “The June meeting should be more interesting”.