The dollar held steady on Wednesday (Apr 27) after the Federal Reserve said it was leaving short-term interest rates unchanged and cracked open the door to a rate hike in June. As oil prices hover near multi-year lows and the dollar remains markedly above its 2014 levels, long-term inflation has fallen under the Fed’s 2% objective in every month over the last three years.
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In the December meeting past year, the central bank announced that it will go for four rate hikes in 2016 however, in its March meeting it revised the hike expectations to just two. Before the announcement, about 31% of investors called for a rate increase in June.
But she has always maintained that the Fed should consider new information as it becomes available, and stressed that the Fed could raise rates at any of its future meetings.
In March, the Fed had cautioned that global developments “pose risks”.
Excluding a resilient jobs sector, other key areas of the USA economy have showed signs of slowing since January, leading most analysts to forecast US gross domestic product will grow less than 1 percent in the first quarter. “The weaker dollar has supported demand, but investors remain wary heading into the central bank meetings”, ANZ said in a note.
While at the same time it held back on its previous warnings about risks to U.S. growth from the world economy, the Fed insisted it would continue to monitor developments closely.
In a 9-1 vote, the Federal Open Market Committee (FOMC) chose to wait until the Fed’s next meeting in June before making a decision on a rate hike. “So, the Fed is really giving an opportunity for a June rate hike should domestic conditions continue to improve back to a moderate level”, said Lindsey Piegza, chief economist of Stifel Nicolaus & Co.
The Fed’s decision to keep rates unchanged was in line with market expectations. However, a rough start to the year kept the Fed on hold as worries about the strength and stability of the global economy plagued markets all around the world.
The Fed acknowledged that growth in household spending had moderated, but said households’ real income had risen at a “solid rate” and consumer sentiment remained high.
Such phrasing is usually seen as prerequisite to policymakers even considering another rate rise.
If they think the economy is faltering, they can hold down key interest rates to stimulate more borrowing for business expansions, auto loans, home-equity loans and more.
Since then, financial-market volatility has subsided and US economic data have shown improvement.
GDPNow, the Atlanta Fed’s measure of economic growth, estimated first-quarter expansion at an annual rate of 0.6 percent, as of Wednesday.
The central bank also reiterated that the actual path of rates will depend on the economic outlook as informed by incoming data.
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Jeff Greenberg, macro strategist at UBS Securities LLC, said if the BoJ announces “a big upgrade” to its asset- purchases program, it could send already-low government bond yields in Japan even lower, making higher-yielding U.S.Treasury bonds more attractive to buyers outside the U.S.
