Federal Reserve holds key USA interest rate steady

Andrew Cummings
May 5, 2019

Fed policymakers said ongoing economic growth, a strong labor market and an eventual rise in inflation were still "the most likely outcomes" as the US expansion nears its 10-year mark.

Siegel says that Moore would "help solve the Federal Reserve's groupthink problem".

The Fed chief, however, did not rule out the probability of rate cuts if the core inflation persistently stayed below 2 percent. The Fed, however, noted that economic activity "rose at a solid rate" during the first quarter. The IOER rate gives the Fed an additional tool for the conduct of monetary policy.

The Fed now has an empty seat on its board, and Trump wants to nominate Stephen Moore, a political commentator who has been criticized in recent weeks for some of his past misogynistic statements about women, to fill it. The Fed has suffered a barrage of attacks from Trump and others in his administration demanding Powell cut rates.

"The dollar will continue to strengthen and (10-year) treasury yields are still going to hover around higher levels". The Australian dollar dropped.

"Overall inflation and inflation for items other than food and energy have declined and are running below 2 percent", the Fed wrote. If Powell can't find the right language to explain the Fed's moves, people might draw a number of conclusions, from assuming that the Fed has capitulated to the President's whims, to predicting that the economy is in trouble. Powell, as he has done repeatedly, said officials will ignore the pressure and chart policy according to what best suits the longer-run prospects of the world's largest economy.

The growth rate "vastly overstates the economy's strength", Bob Schwartz of Oxford Economics said in a recent analysis. Central bankers also acknowledged the economy was growing strongly.

That characterization followed a report this week showing consumer spending rebounded in March following a lackluster start to the year. Platinum edged 0.1 per cent lower to $847.20 an ounce, having touched a one-month trough of $839 earlier in the session, while palladium fell 0.2 per cent to $1,351.70 an ounce.

Still, even with consumption intact and the labor market tightening, inflation has remained vexingly low.

Trump's call for a rate cut of a full point would reverse all of the Fed moves past year and likely undermine any credibility the central bank has with financial markets.

"We suspect that some transitory factors may be at work thus, our baseline view remains that with a strong job market and continued growth, inflation will return to 2 percent over time", he said.

Fed fears over low inflation had been mounting, with Powell recently calling it "one of the major challenges of our time". "I am open to a rate cut to try to combat this".

"What was news to me was the emphasis on transitory factors holding back inflation", said Michael Gapen, chief US economist at Barclays Plc.

The Fed also trimmed the amount of interest it pays banks on excess reserves to 2.35 percent from 2.40 percent in an effort to ensure its key overnight lending rate, the federal funds rate, remains within the current target band.

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