Wall Street fell after Fed's decision on interest rates

Sean Reid
May 4, 2018

Federal Reserve officials Wednesday held their key interest rate steady despite rising inflation and fears of a global trade war triggered by President Trump's tariffs.

The question looming over Wednesday's meeting centered on how officials might raise rates over the coming years, which could potentially shift the central bank from a position of spurring economic growth to restricting it. Wednesday's announcement was not accompanied by a press conference with Fed chair Jay Powell nor were updated economic forecasts from the Fed released.

The quarterly meetings have been the only ones to feature rate changes since the Fed first starting tightening policy in December 2015.

"The Fed sees little reason to be concerned with inflation marginally above its 2.0% target, particularly after such a long period of underperformance", Clarke said.

The FOMC's two-day meeting followed the release of data Monday that showed inflation measured by the central bank's preferred gauge had hit its 2 per cent target after being below that goal for nearly every month since April 2012. They want unemployment to stay at a level low enough to fuel more wage gains and keep inflation at their 2% target.

Bond yields, which move opposite price, fell on the day, with the Fed-sensitive 2-year yield dipping to 2.49 percent. The Fed's decision to leave its benchmark overnight lending rate in a target range of between one.five percent and one.seven-five-percent was unanimous. Core PCE is the Fed's preferred measure of inflation.

Following the release, equity markets in the US were higher, but little-changed, with the Dow up 0.2%, the S&P 500 u 0.1%, and the Nasdaq up 0.3%.

A report released by payroll processor ADP on Wednesday showed private sector employment in the USA increased by slightly more than anticipated in the month of April.

The Fed's comments on the labor market were also of interest: as in March it said that the labor market "continued to strengthen.". While the statement was expected dollar bulls were hoping for a more hawkish fed.

"The market will have to get used to the fact that in order to prevent an economic overheating interest rates in the United States will continue to rise", said Commerzbank (OTCMKTS:CRZBY) analysts.

The survey-based consumer price index, a more widely watched inflation gauge, was up in April by 2.4% for the previous 12 months.

The silver price rose over 1 percent on Thursday (May 3) after the Federal Open Market Committee (FOMC) eased investors' concerns by announcing that interest rate increases will be gradual.

Committee members acknowledged that both inflation and core PCE (personal consumption expenditures) are now in range of the 2% target. National data already indicated that expectations for a steady headline rate in April would turn out to be too optimistic. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.

Most analysts expect the Fed to next raise the federal funds rate by a quarter of a percentage point at the meeting in June. The minutes from the meeting suggest the inflation upturn was expected and "wouldn't change the projected path for the federal-funds rate".

Those who voted were Jerome Powell, Chairman; William Dudley, Vice-Chairman; Thomas Barkin; Raphael Bostic; Lael Brainard; Loretta Mester; Randal Quarles and John Williams.

Myles Udland is a writer at Yahoo Finance.

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