In a widely expected move, Federal Reserve officials left interest rates unchanged at their meeting on 2 May whilst acknowledging that inflation has risen and is close to target.  The central bank’s policy-setting Federal Open Market Committee held the funds rate at a target of 1.5% to 1.75% in an unanimous 8-0 decision, reporting in a statement that “inflation on a 12-month basis is expected to run near the committee’s symmetric 2 percent objective over the medium term”.  By using the word “symmetric”, officials may be signalling their willingness to allow inflation to slightly exceed the 2% goal.  The committee also confirmed intentions to stay with gradual tightening of monetary policy, saying that it “expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate”.  Further, it noted the weakness in growth in the first three months of 2018, removing a reference in the March statement that the economic outlook had “strengthened in recent months”, though officials also highlighted some improvements in the economy, to the growth in business fixed investment in particular.

Markets have been watching the Fed for clues as to how aggressive on rate hikes it will be this year.  Expectations before the meeting were for a total of 3 rate hikes, with a fourth given a nearly 50% chance.  Following the release of the Fed’s statement, the yield on 10-year U.S. Treasury notes slipped slightly to 2.96% while the S&P 500 Index of U.S. stocks climbed to its highest level of the day and the Bloomberg Dollar Spot Index fell.

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