“The comments did not change the direction of the dollar because the two rate hikes by the Fed remain intact”, said Minh Trang, senior currency trader at Silicon Valley Bank in Santa Clara, California.
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It noted that business investment and exports have been soft, and that inflation remains well below its 2% target rate due not only to the plunge in energy prices but also to cheaper imports of other goods.
“Labor market conditions have improved further even as growth in economic activity appears to have slowed”, the Federal Open Market Committee said. The Fed’s last rate hike was in December, when it raised the rate by a quarter of one percent.
The Fed will be meeting on June 14-15 which analysts are pointing to as the time it may raise rates if the United States economy keeps up its modest rate of growth. But investors – including Hopper – are skeptical: Ahead of Wednesday’s meeting, futures markets were betting the odds of a rate hike this summer were just one in four, and there was a 44 percent chance the next move won’t happen until the end of the year.
“The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation”, the committee wrote.
“If anything, Fed officials will likely want to encourage markets to price in more tightening than is being priced in now”, said Jim O’Sullivan, an economist at High Frequency Economics, in a note.
Indeed, the central bank dropped the reference to “global risks,” but maintained that it will continue to take “financial and worldwide developments” in account before it decides to raise rates again.
The central bank also reiterated that the actual path of rates will depend on the economic outlook as informed by incoming data.
“A range of recent indicators, including strong job gains, points to additional strengthening of the labor market”, the FOMC said in its official statement.
After the turmoil that hammered world markets at the start of the year, US policymakers have lowered expectations for rate increases in 2016, saying they would closely monitor overseas developments before making a move.
The divergence reflects the contrast between a relatively solid USA economy – viewed as able to withstand higher borrowing rates – and weaker economies in Asia and Europe.
That policy divergence could pose risks for the global economy and may be a reason the Fed has at least slowed its march toward higher rates.
Bullion has rallied 17 percent this year on speculation that the Fed might not raise rates this year amid uncertainty over the global economy. Esther L. George, president and chief executive officer of the Federal Reserve Bank of Kansas City, was the lone dissenter.
Last month at a press conference, Fed Chair Janet Yellen said she was “wary” of wintertime data, which could be distorted by seasonal events.
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First, the Fed didn’t add back the phrase about “balanced” risks. Reflecting this trend, the Fed’s first quarter economic growth estimate was downgraded to the zero percent level from the two-plus percent forecast at the beginning of the year.
