The majority of policymakers now said they expected it would be appropriate to raise rates by about a half a percentage point by the end of this year. “Inflation picked up in recent months”, the Fed said in a policy statement in which it kept the target range for its overnight lending rate at 0.25-0.5 percent.
Advertisement
The FOMC removed any reference to the balance of risks in the statement, saying only “global economic and financial developments continue to pose risks”.
“Fed chair Janet Yellen in her press conference also signalled a greater willingness to tolerate upside surprise on inflation as opposed to it continuing to run below 2 per cent, as the Fed has more policy room to deal with an upside surprise in inflation than a downside surprise”.
Meanwhile, the Fed revised downward the growth estimate for the USA economy for 2016 to an annualised real 2.1-2.3 per cent in terms of gross domestic product from an earlier forecast 2.3-2.5 per cent in December. The dollar tumbled against the yen and euro soon after the announcement and it continued to struggle in Asia, edging up only marginally against the two currencies. US 10-year notes, on the other hand, briefly hit 2 percent going into the release of the Fed decision, a seven-week high, but fell to session lows as well.
But since the start of the year, there’s been a huge disparity between the Fed’s expectations and Wall Street, which at one point bet there would be no rate hikes at all this year.
The central bank’s baseline expectations for U.S. economic activity, the labor market and inflation “have not changed much since December”, Yellen said, adding that “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate”.
In its policy statement, the Fed noted the risks still emanating from overseas, which Ms Yellen said included renewed signs of weakness in Japan and Europe, and the ongoing slowdown in China. Esther George, president of the Federal Reserve Bank of Kansas City, voted to raise rates by a quarter-point. And the unemployment rate is a low 4.9 percent, close to the rate the Fed associates with full employment.
So overall, the inflation picture has been neutral, though most economists say the trend is likely to be up in coming months because gasoline prices have been rebounding.
Advertisement
Top officials of the USA central bank are keeping their key interest rate steady for the time being.
