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US Fed keeps rates unchanged, still expects only ‘gradual’ rate hikes.

US Fed keeps rates unchanged, still expects only ‘gradual’ rate hikes.

February 9, 2017
abstract-740257

Source: Straits Times

WASHINGTON (AFP) – The US Federal Reserve on Wednesday (Feb 1) kept the benchmark interest rate unchanged in its first policy meeting since President Donald Trump took office, and said it still expects it will need only gradual rate increases.

While noting continued economic growth, solid job gains and improving business and consumer confidence, the central bank statement gave no hint of concern that the Trump administration’s spending or tax policies might create pressure to hike rates faster.

“The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” the policy-setting Federal Open Market Committee (FOMC) said in a statement that was nearly identical to the December statement.

The FOMC gave no sign of concern about inflation, which has been inching higher but remains “below the Committee’s two per cent longer-run objective.”

However, it no longer cited low energy prices as a factor keeping prices low.

The Fed last month adopted only its second interest rate increase in a decade – putting the target range for the overnight lending rate at between 0.5 and 0.75 per cent. And it indicated it expected to implement three interest rate increases this year.

Central bankers have been cautious about raising rates too quickly, and likely will tread cautiously as Trump shakes up US policy, threatening to cancel trade pacts and impose new tariffs, criticising trade partners and promising economic stimulus, tax cuts and slashed regulation.

But concrete policies are just taking shape and members of the FOMC last month cited “considerable uncertainty” about the economic outlook.

With unemployment already low and wages and inflation starting to creep up, some analysts worry that major government projects risk overheating the economy and sending prices soaring.

That likely would prompt the Fed to raise interest rates even faster – and possibly put Fed Chair Janet Yellen at odds with Trump.

Yellen said recently the economy is on course to meet the Fed’s targets for inflation and full employment, but the bank will be watching to see what policies the new administration pursues. She has said spending to increase productivity would be welcome, since that would increase growth without driving inflation.

While analysts were not expecting any change at this meeting, they were looking for any hint the Fed was leaning towards a rate cut sooner rather than later.

The FOMC statement repeated that central bankers will be watching inflation and unemployment, assessing “indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

The Fed also noted that business investment “remains soft” even as household spending has been rising, but “consumer and business sentiment have improved of late.” Policymakers continue to view risks to the outlook as “roughly balanced,” it said.

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