Federal Reserve

Fed keeps US rates unchanged, is upbeat on economy

Fed gives no signal on timing of its next move

PUBLISHED : Thursday, 02 February, 2017, 3:49am
UPDATED : Thursday, 02 February, 2017, 3:49am

The Federal Reserve kept interest rates unchanged on Wednesday in its first meeting since President Donald Trump took office, but painted a relatively upbeat picture of the US economy that suggested it was on track to tighten monetary policy this year.

The central bank said job gains remained solid, inflation had increased and economic confidence was rising, although it gave no firm signal on the timing of its next rate move.

“Measures of consumer and business sentiment have improved of late,” the Fed said in a unanimous statement following a two-day policy meeting in which it left its benchmark interest rate in a range of 0.50 per cent to 0.75 per cent.

Fed policymakers also highlighted that unemployment was still hovering near its recent low. The unemployment rate is currently 4.7 per cent, at or near the level many policymakers consider to be full employment.

Expect a more hawkish Fed in the second half of 2017

The central bank raised rates in December for only the second time in a decade and forecast three rate increases in 2017. The Fed is still awaiting clarity on the possible impact of Trump’s economic policies.

Fed Chair Janet Yellen recently underscored that with the economy near full employment, the Fed risked a “nasty surprise” on inflation if it is too slow with rate hikes.

US factory, payrolls data point to strengthening economy

The Fed said in its statement it still expects inflation to rise to its 2 per cent target in the medium term, although it noted that market-based measures of inflation compensation are still low and survey-based measures of long-term inflation expectations are little changed. It did however indicate that the effects of weak oil prices had ended, something that will give it a “clean” inflation reading going forward.

On Monday, the Commerce Department reported an uptick in inflation to 1.7 per cent.

“The economy continues to chug along and sentiment has improved. The Fed does sound more confident about eventually getting to its 2 per cent inflation target,” said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management.

Investors had all but ruled out a rate increase this week, given the uncertainty surrounding Trump’s fiscal and trade policies and how they would affect the Fed’s outlook.

Financial markets were little changed after the rate decision.

Trump’s promises on infrastructure spending, tax cuts, regulation roll-backs and a renegotiation of trade deals could quickly spur higher inflation, which may necessitate a faster pace of rate hikes.

The businessman-turned-politician has offered few details on his economic plans or a timeline for their roll-out, while the announcement of policies viewed by many as protectionist and an immigration crackdown have caused market jitters.