Federal Reserve keeps rates as is but sounds notes of optimism

The US Federal Reserve kept interest rates unchanged last night 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 sometime 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 0.5% to 0.75%.

Fed policymakers also highlighted that unemployment was still hovering near its recent low.

The US unemployment rate is 4.7%, at or near the level many policymakers consider to be full employment.

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 president Trump’s economic policies.

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

The Fed said in its statement it still expects inflation to rise to its 2% target in the medium term, although it noted market-based measures of inflation compensation are still low and survey-based measures of long-term inflation expectations are little changed.

On Monday, the US Commerce Department reported an uptick in inflation to 1.7%.

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.

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

After heavy dollar selling on Tuesday to levels that a few weeks ago were deemed attractive for dollar buyers, an air of caution surrounds the market for now, traders said.


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