Fed set to keep US rate fixed for now

THE US Federal Reserve is set to hold interest rates steady this week, but will probably further encourage expectations that it will lift borrowing costs next month on the back of rising inflation and low unemployment.

Investors have all but priced out the chance of a rate hike at the end of the Fed’s two-day policy meeting today, particularly given its adherence in recent years to only raising rates at meetings that are followed by media briefings.

The central bank is due to announce its decision today. Fed chairman Jerome Powell is not scheduled to hold a media briefing.

“Fed speakers have done little to push back against this expectation… we expect no fireworks,” said JPMorgan economist Michael Feroli in a note to clients.

The Fed raised its benchmark overnight lending rate at its March 20-21 meeting by a quarter percentage point to a target range of between 1.50 percent and 1.75 percent.

It has forecast another two rate rises this year, although policymakers see three as possible. The Fed’s next policy meeting is scheduled for June 12-13. Investors overwhelmingly see a rate hike then.

The pace of rate increases has picked up since the central bank began its tightening cycle in December 2015. It raised rates once in 2016, but lifted borrowing costs three times last year amid a strengthening economy.

Unemployment is at a 17- year low of 4.1 percent and the Trump administration’s tax cuts and fiscal stimulus are expected to further juice the economy.

Ahead of this week’s meeting, Powell has stuck to flagging a middle-of-the-road approach on rate increases in the face of data showing the robust economy had not yet triggered a jump in inflation.

But data on Monday showed that price gains are now near the Fed’s 2 percent target.

The Fed’s preferred measure of inflation soared 1.9 percent in the 12 months to March – the biggest increase since February 2017 – after increasing 1.6 percent in the year to February, the US Commerce Department reported.

“The real headache is that it is easy to be the Fed when inflation is below target… an important aspect as we go into this May meeting, is the tone of the debate changes as we get to 2 percent and beyond,” said Torsten Slok, an economist at Deutsche Bank.

Other data last week showed that while US economic growth slowed to an annual rate of 2.3 percent in the first quarter, wages and salaries shot up 0.9 percent in the same period. That was the largest increase since the first quarter of 2007.

Fed policymakers have also been wary about the potential negative impact of the Trump administration’s protectionist trade policies.

A US trade delegation is expected to meet Chinese officials in Beijing tomorrow and Friday after weeks of tension between the world’s two largest economies. – Reuters/African News Agency (ANA)