US Fed leaves rates unchanged, downplays inflation concerns

Trump to Fed: Slash Rates Now

Republicans in Congress surely share the president's desire to avoid a recession, but they're also wary of a politicized Fed, which Trump surely would not hesitate to continue to pressure to cut rates even if that meant spiking inflation.

The change isn't likely to be economically meaningful and instead reflects a technical effort to improve the way the Fed's policy decisions are implemented in overnight money markets. The Nasdaq showed modest gains, buoyed in part by a climb in Oracle shares after its quarterly results.

On the other hand USA private demand grew at a sluggish pace in the first three months of the year, and soft inflation is continuing to puzzle Fed officials as above-trend growth and unemployment of just 3.8 per cent fail to push year-on-year price growth durably to the 2 per cent target.

Fed chairman Jerome Powell said low inflationary pressures might only be "transitory", eliminating hopes the Fed is at least considering the idea of a rate cut this year because of tame inflation.

"If we did see inflation running persistently below (the target), that is something that we would be concerned about and something that we would take into account in setting policy", he said. However, that initial rally reversed on Powell's comments on appropriate policy and transient inflation.

The Fed ignored the president's demand, keeping rates unchanged.

"I see us on a good path for this year", he added.

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After a two-day meeting in Washington, the central bank said borrowing costs will remain unmoved between 2.25pc and 2.5pc as United States economic growth remains "solid" and the labour market "strong".

"There's concern among the Fed that the positive impact of the tax cuts is beginning to wane, and growth may indeed prove softer going forward", said Matt Cairns, rates strategist at Rabobank.

The chief concern flagged in the policy statement was the now "muted" level of inflation, which continues to fall short of the Fed's 2 percent target. If Powell can't find the right language to explain the Fed's moves, people might draw a number of conclusions, from assuming that the Fed has capitulated to the President's whims, to predicting that the economy is in trouble. In a sharp turn from December's forecasts, the Fed officials made a decision to pause their steady campaign of raising rates due to an uncertain outlook for the USA and global economy.

The economy expanded at a 3.2 per cent annualized pace from January to March, boosted by exports and inventories growth.

But Wednesday, despite evidence that core inflation had slipped even lower, he kept a calm bearing and pointed to idiosyncratic price declines in clothing, due to methodological changes, as well as in investment-management services. By moving interest rate targets up or down, the Fed aims to keep the economy in balance, achieve maximum employment, and maintain stable prices.

Sentiment was shaken somewhat by the Fed, which left its benchmark interest rate — which determines the cost of borrowing for individuals and businesses — in a range of 2.25% to 2.5% as expected on Wednesday.

It did however trim a key rate which it pays banks who leave excess reserves, from 2.40pc to 2.35pc, in a bid to ensure its lending rate stays within the current target range.

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