Inflation -- and rate hike -- fears have investors wary

05 May, 2018, 02:08 | Author: Barbara Daniel
  • Federal Reserve Building

Wrapping up a two-day meeting, the Federal Open Market Committee held USA interest rates steady on Wednesday, expressing confidence that a recent rise in inflation would be sustained, putting it on track to raise borrowing costs in June.

The Fed lifted its benchmark rate three times previous year - while also beginning to slowly trim its balance sheet. While a fairly sizable jump, the sector's relatively small contribution to the UK's overall GDP means that the impact on the currency was limited, and did little to improve hopes of a Bank of England interest rate hike next week.

Fed officials otherwise acknowledged recent economic developments, noting a modest slowdown in household spending in the first quarter, but also mentioning the impressive recent pace of business investment and the still-strong labor market.

In fact the Federal Reserve seemingly hinted that United States inflation may be allowed to pass (slightly) above the 2 percent (y/y) target, implying that further rising U.S. inflation may not become a cause for more aggressive monetary tightening.

The statement released after the meeting, however, showed Fed's confidence over inflation, acknowledging that core inflation rate has moved close to the central bank's 2-percent target.

On growth, they remained pretty much optimistic...

Officials left unchanged their view that near-term risks to the economic outlook appeared "roughly balanced". Despite the positive vibes from Apple's (AAPL) strong earnings report earlier in the week, stocks slid on Wednesday after the Fed's latest policy announcement. They also referred to the growth outlook as still moderate - same language they used in March. The uncertainty is about the fourth rate hike.

First is the interest rate gap. However, the key question is about the number of rate hikes.

The euro slipped slightly after the inflation numbers but recovered and rose 0.3 per cent to US$1.9986. Trade talks between US Treasury Secretary Steven Mnuchin and Chinese Vice-Premier Liu He are set to start later today (03/05).

But a string of ominously weak data is causing speculation that the European Central Bank may have to delay closing its bond buying programme from September.

"We see a rising risk of a recession in 2019", said economist Paul Ashworth of Capital Economics. Moreover, in the second half of the year, twin deficit worries are likely to come back alongside the volatility related to mid-term elections in the U.S., and the likely pickup in growth momentum for the euro zone, essentially pulling the dollar down, again. Partly, this support and relief rally in the dollar has already taken place and thus the upside momentum on this front could be limited going ahead.

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