US Fed keeps interest rates unchanged as market expects

An investor looks at an electronic board showing stock information at a brokerage house in Nanjing

An investor looks at an electronic board showing stock information at a brokerage house in Nanjing

"To be fair, the US economy has historically experienced weaker growth at the start of a new year as consumers front-load spending into Q4 amid the holiday season", Piegza wrote.

The economy expanded at a solid 2.3 percent annual rate in the first three months of the year.

Against a broader group of currencies, including those from emerging markets, the greenback is now in positive territory against half of them.

The question remains how quickly and high Jay Powell, the Fed chairman, and his colleagues boost borrowing costs as they attempt to prevent the USA from overheating while keeping the economy moving at a steady pace.

First is the interest rate gap.

Fed Chair Jerome Powell had earlier said the bank would continue to gradually lift rates in the face of a robust USA economy. This means USA rates are likely to pull still further ahead of all others in the developed world.

The Fed's latest "dot plot" now forecasts another two rate rises this year, although some analysts see three increases as possible.

Stocks end lower as Fed maintains status quo.

"Good news is now bad news", said Peter Kenny, senior market strategist at Global Markets Advisory Group in NY.

"The dollar's rebound has put pressure on gold and that is likely to persist", said Julius Baer analyst Carsten Menke.

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The dollar's rally this year is quite a turnaround from 2017 when it weakened against every other currency.

The dollar has erased all its 2018 losses in the past fortnight. Some market participants have said they believe it will raise rates once a quarter instead, making it four for the year. It is expected to increase rates in June.

The US economy is on its way to achieving what will be longest expansion of history, surpassing record of Democrat Bill Clinton.

"We see a rising risk of a recession in 2019", said economist Paul Ashworth of Capital Economics. Investors have placed 40% odds of a rate hike in December, but 41.9% expect the Fed to stay the course and enter 2019 with a target range of 2% to 2.25%, according to the CME FedWatch Tool. Find us on Facebook too!

China's central bank meanwhile has also contributed to dollar strength via liquidity injections into money markets and by cutting reserve requirement ratios for banks by 100 basis points in mid-April. The final Purchasing Managers' Index fell to a 13-month low of 56.2 in April from 56.6 in March.

A related question for Mr. Powell and his colleagues is how the Fed would respond if inflation rises above the 2% target, which has scarcely happened since the central bank formally adopted it in 2012.

"That indeed leaves the Fed as the only tightening game in town", Wall said. The Fed's comments on the USA labor market were also of interest.

In the bond market, Treasuries were higher, but little-changed, with the 2-year yield right at 2.5% and the 10-year sitting at 2.96%. The Fed's plan is to continue to withdraw stimulus in a gradual manner, as tax bill and Donald Trump's spending plan take over.

The U.S. dollar index decreased on Wednesday as investors were digesting the latest Federal Reserve statement.

Immediately following the data, the US Dollar slipped back versus the Euro and the Japanese Yen, with the Dollar Index (DXY) dropping from 92.67 ahead of the FOMC decision to as low as 92.25.

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