US Fed holds interest rates steady, says inflation is close to its target

Chip Somodevilla/GettyFederal Reserve Board Chairman Jerome Powell
  • The US Federal Reserve on Wednesday said it held interest rates steady after a two-day policy meeting.
  • It confirmed that inflation – the “price stability” part of its dual mandate from Congress – has risen to almost hit its 2% target.
  • Inflation over the next year should “run near” 2%, the Fed said, in updated language from the March statement that said inflation would “move up” towards that level.
  • The next interest rate hike is expected in June.

The Federal Reserve on Wednesday left its benchmark interest rate unchanged, and confirmed that inflation is near its 2% target.

The central bank was unlikely to announce an interest-rate hike after its policy meeting, in keeping with its habit of only doing so at gatherings that are followed by a press conference. The next such meeting is from June 12-13.

Still, investors were expected to parse the statement for how the Fed appraised the economy, and what that suggests about how quickly it would raise interest rates this year and in the long run. According to Bloomberg’s World Interest Rates Probability, traders see a 64% chance of a rate hike at the June meeting.

Inflation over the next 12 months should “run near” the 2% target, the Fed said, updating its language from March that indicated inflation would “move up” towards that level.

On Monday, just before the Federal Open Market Committee’s two-day meeting, we learned that the Fed’s preferred gauge of inflation nearly hit its 2% target after years of lagging behind. Core personal consumption expenditures, a gauge of consumer prices that excludes volatile food and energy costs, rose 1.9% in the year through March. It was the biggest increase since last February, according to a Commerce Department report.

And so, how the Fed characterised inflation in its statement was key to watch. Its 2% target is symmetric, meaning it would be equally as problematic if inflation lingers too far above or below that level. It also means the Fed would be comfortable with allowing inflation to run above 2%, since it’s not a ceiling.

The Fed’s comments on the labour market were also of interest. Its statement said, as it did in March, that the labour market “continued to strengthen.” When the April jobs report is released on Friday, economists forecast it will show that nonfarm-payroll additions picked up from just 103,000 in March, according to Bloomberg.

Here’s the full Fed statement:

“Information received since the Federal Open Market Committee met in March indicates that the labour market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Recent data suggest that growth of household spending moderated from its strong fourth-quarter pace, while business fixed investment continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 per cent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labour market conditions will remain strong. Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 per cent objective over the medium term. Risks to the economic outlook appear roughly balanced.

In view of realised and expected labour market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 per cent. The stance of monetary policy remains accommodative, thereby supporting strong labour market conditions and a sustained return to 2 per cent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its objectives of maximum employment and 2 per cent inflation. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

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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