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Review of the FOMC Meeting in May

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By: Pedro Santiago – Forex Focus

Fed stays pat on interest rates, but economists see a hike in June.

The Board of Governors of the Federal Reserve System (the Fed) voted unanimously to leave its benchmark interest rate, or the federal funds rate, on hold at 1.5-1.75 percent, following its monetary-policy meeting on May 2, 2018. Under the new chairman, Jerome H. Powell, the FOMC’s (Federal Open Market Committee’s)unanimousdecision not to tinker with the rate was widely expected by the markets, especially after the Fed hiked the key interest rate by 25 basis points in its previous meeting in March. The Fed, however, acknowledged that consumer inflation has been on an upward trajectory in the last few months, but gave little indication in the policy statement that it expected prices to spiral out of control or economic activity to slowdown suddenly.

Key highlights of the monetary-policy statement 

According to the FOMC, the US economy has been growing at a moderate pace since its last meeting in March of this year, led by the labour market, which continues to report job gains, further pushing the country’s unemployment rate to record lows. Although household spending has moderated since fourth-quarter 2017, inflation continues to trend higher on a 12-month basis, with both the headline and core inflation rates holding near the 2-percent mark. However, long-term expectations for inflation continue to remain little changed from the earlier surveys.

Recent economic data from the United States

With the Fed policy aimed at fostering maximum employment and price stability, let’s look at the recent employment and inflation numbers that could throw some light on future interest-rate expectations in the US.

Beginning with the jobs data, the unemployment rate in April slipped to 3.9 percent, after holding still at 4.1 percent for the last six months. The April numbers are the lowest since December 2000, as the country added 239,000 workers to the labour force—although the total number of employed personnel remained unchanged at around 155 million. A breakdown of the jobless data shows that the unemployment rate among Asians was the lowest at 2.8 percent, followed by whites and adult men at 3.6 and 3.7 percent respectively.

On the inflation front, annual headline inflation in the US edged higher to 2.5 percent in April from 2.4 percent the previous month, the highest since February 2017, as prices of fuel oil, gasoline, shelter, medical services, food, apparel and commodities rose, offsetting the fall in prices of electricity, transportation and piped gas services. Core inflation, which excludes volatile food and energy prices, came in at 2.1 percent, unchanged from the previous month.

With the unemployment rate at multi-year lows and inflation hovering around the central bank’s target of 2.0 percent, one would expect the Fed to start hiking rates more quickly. But the FOMC in its statement made it clear that economic conditions in the country will be closely monitored, and the federal funds rate will evolve in line with economic growth. The Fed also maintained that key interest rates will remain at historically low levels in the near-term, although are expected to rise in the long run.

Outlook

Economists had predicted only a 6-percent chance of a rate hike in the May meeting, while they are overwhelmingly agreed in their view that the Fed will increase rates by 0.25 percent in the forthcoming monetary-policy meeting to be held in June. While the Fed has indicated that it will assess a wide range of financial and International data in addition to domestic economic events to determine the timing and size of its monetary-policy action in the future, chief economist of the investment-banking division at Goldman Sachs, Jan Hatzius, stated that the company believes that the Fed will keep raising interest rates at least once in each quarter until 2019; that’s about 75 basis points for the rest of this year.

Fed fund futures are pricing in a 25 basis-points rate hike in June, in line with analysts’ expectations with the implied probability at 94 percent, while the probability is 78 percent for September and 54 percent for a hike in December.

 

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