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Federal Reserve upbeat on US economy

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The US central bank remained positive on the economy, as it kept interest rates on hold in its first meeting since President Donald Trump took office.

The Federal Reserve ruled unanimously to keep its benchmark interest rate in a range of 0.5% to 0.75%. The jobs market and economic activity had continued to strengthen, it said.

“Measures of consumer and business sentiment have improved of late,” the central bank also said in a statement.

The Fed had raised its benchmark interest rate by 0.25% in December, only the second increase in a decade.

Trump effect

President Trump has promised to boost growth through tax cuts, spending and deregulation, raising the prospect of higher inflation.

Fed chairwoman Janet Yellen warned last month that, with the economy near full employment, the central bank risked a “nasty surprise” on inflation if it was too slow with rate hikes. The Fed said inflation “will rise to 2% over the medium term”, but did not comment on the effect of the Trump administration’s plans.

Despite being upbeat, the central bank also signalled the Federal Open Markets Committee (FOMC), the body which sets rates, would still only make “gradual increases”.

It did not give any update on when the body might next raise rates.

Investors were hoping for guidance on when the next rise would be and how many were planned for this year.

“This is only the first FOMC meeting of eight in 2017 so there are still plenty of opportunities for the Fed to raise interest rates throughout the year and it is likely that we will see a rate rise in March or June,” said Kully Samra, UK managing director of wealth management firm Charles Schwab.

“In our view, two rate hikes this year would be sufficient to stave off inflation concerns and would not negatively impact economic growth.”

‘Chug along’
Dennis de Jong, managing director at UFX.com, said that uncertainty about Mr Trump’s economic policies could further delay the next rate rise.

“With Trump still light on any concrete plans or time lines, [chairwoman Janet] Yellen may be forced to wait even longer before pulling the trigger,” he said.

Official figures last week indicated the US economy grew at an annual pace of 1.9% in the fourth quarter of last year, a slowdown from growth in the previous quarter of 3.5%.

However, the central bank’s outlook suggested “the economy continues to chug along and sentiment has improved”, said Brian Jacobson, chief portfolio strategist at Wells Fargo.

The dollar and US stock markets were little changed on the Fed’s announcement, as investors had widely expected rates to be left untouched. The Dow Jones index rose 0.1% at 19,891 points. The S&P 500 index moved less than 1 point to 2,279 and the Nasdaq edged up 0.5% at 5,643.

 

Source: BBCB

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