The Dollar Today: Federal Reserve Rate Meeting Looms Large

Canadian dollar weekly graph

The Federal Reserve is raising its benchmark interest rate to reflect a solid US economy and signaling that it's sticking with a gradual approach to rate hikes for 2018 under its new chairman, Jerome Powell.

The 2.8% uptick in average weekly earnings in the three months to January suggests that wage growth is starting to pick up more substantially, to the benefit of consumers. In December, officials said they expected unemployment to be 3.9 percent both this year and next. The action was approved 8-0, avoiding any dissents at the first meeting that Mr Powell has presided over as chairman since succeeding Janet Yellen last month. Fed officials "will likely discuss the risks of a trade war during this meeting", she says, but the details of that discussion won't be available until the minutes of their meeting are released in three weeks.

Central bankers did offer hints that they may raise rates a fourth time later this year as a result of faster global growth, stronger business investment and massive tax cuts. But after rate hikes, gold prices tended to drop since rising interest rates typically make non-yielding bullion less attractive. A sharp rise in wage growth reported in the government's January jobs report triggered fears that higher labor costs would lead to higher inflation and, ultimately, to higher interest rates.

That mortgage owner could pay an additional $312.50 a month, or $3,750 a year, in interest if the Fed follows through with two more quarter-point hikes this year. Price gains are still expected to stabilize around the Fed's 2 per cent target over the medium term, the FOMC said.

Rates are still historically low.

Dollars exchange rates could still find a rallying point in the wake of the Fed announcement, though, if the latest economic forecasts and dot plot are more hawkish in nature.


It cited a stronger outlook for economic growth and did not give reasons for the higher projection - saying that it was based on the median expectations of the committee.

The 2018 "dot" now sits at 2.125 percent - signaling three rate increases from the current 1.25-1.5 percent range, and four officials had higher projections at the December meeting. The US jobless rate held at 4.1 per cent in February, equal to its lowest since the tech boom, while payroll employment expanded by a robust 313,000. The Fed's preferred measure of inflation was expected to end 2018 at 1.9 percent, unchanged from the previous forecast, but it is seen rising a bit above the Fed's target next year. It is the sixth increase since December 2015, when it began raising rates from rock-bottom levels. That was an increase of a quarter of a percentage point.

A smaller-than-expected uptick in public sector net borrowing for February offered further support to GBP exchange rates, boosting confidence in the underlying health of the United Kingdom economy.

US economic strength is evident with the unemployment rate at a 17-year low and companies receiving windfalls from President Donald Trump's tax cuts, which they may reinvest to create jobs and improve wages.

The outcome of the Fed meeting is due at 18.00 GMT (14.00 Eastern Time), so expect some volatility in the Dollar exchange rate complex.

Meanwhile, in data, United States total homes sales in February jumped to 5.54mln, up from 5.38mln, with economists having expected a reading of 5.4mln.

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