wnol.info May 25 2018

US Federal Reserve leaves key interest rate unchanged, notes rising inflation

May 25 2018, 02:54 | Alonzo Simpson

Strong outlook for the US economcy rising yields have boosted the US dollar

US Dollar Moves Near 4 Month High Today

The Dollar is showing signs of momentary weakness after the latest FOMC statement indicated to investors that the Federal Reserve will not raise USA interest rates at a faster pace than has already been priced into the market.

The Fed's overnight lending rate in already in a target range of 1.50-1.75 percent compared with the European Central Bank's closely watched deposit rate benchmark at minus 0.4 percent while the Bank of Japan pledges to guide short-term interest rates at minus 0.1 percent.

The Japanese Yen would also likely benefit if the trade talks between the USA and China did lead to a period of renewed uncertainty in the market.

U.S. investors fretted about the acknowledgement of rising inflation.

"The market will have to get used to the fact that in order to prevent an economic overheating interest rates in the United States will continue to rise", Commerzbank analysts said, predicting that rate differentials between countries would have a greater bearing on currencies and could cement euro/ dollar around US$1.20.

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

Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore, said that in addition to focusing on the Fed's policy statement, equity investors may be turning cautious on the outlook for corporate profits, given potential cost pressures from recent rises in oil prices.

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United States 10-year yields were at 2.970 percent, down from 2.976 percent late on Tuesday. "We've reached full employment, inflation has hit 2 percent". Recent data suggest that growth of household spending moderated from its strong fourth-quarter pace, while business fixed investment continued to grow strongly.

In maintaining the federal funds rate in the range of 1.5-1.75%, the committee stressed its inflation target is "symmetric".

Friday's employment report for April will be evaluated for further indications of the strength in the USA labour market and inflation pressures.

Wednesday's Fed statement did not mention trade, simply noting, as it had done in March, that the risks to the economic outlook "appear roughly balanced".

An important US data point today is the just-released ADP national employment report for April, which showed a rise of 204,000.

The Committee also announced it expected inflation on a 12-month basis to "run near the Committee's symmetric 2 percent objective over the medium term". In the near term, we believe the positive push on account of the rise inflation and interest rate expectations could help the dollar to some degree.

Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.

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