US Fed holds interest rates steady: 5 key takeaways

US Fed holds interest rates steady: 5 key takeaways

LONDON, May 3 (Reuters) - The euro rose off four-month lows on Thursday as the dollar's recent rally came to a halt after the Federal Reserve did little to alter market expectations for further interest rate rises this year.

Sluggish inflation stood in the way of quicker rate rises a year ago, but headline inflation has recently returned to the Fed's target of 2 per cent, leaving policymakers better placed to forge ahead with their rate-lifting plans.

The Fed's rate-setting committee also downplayed a recent slowdown in economic and job growth, saying activity had been expanding at a moderate rate and job gains, on average, had been strong in recent months.

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 percent target after being below that goal for nearly every month since April 2012. Investors had all but ruled out another increase at this week's meeting.

Many on Wall Street think the economy is accelerating so quickly that the Fed will have to hike rates three more times in 2018 to keep the economy from overheating.

The U.S. dollar bought 109.68 Japanese yen, lower than 109.80 Japanese yen of the previous session.

The changes in the statement "set the Fed up for a June hike - barring any unforeseen shocks", says Michael Dolega, senior economist at TD Economics. They may still raise rates in June.

The dollar has been buoyed in recent weeks by the strong USA economic outlook and rising Treasury yields amid signs of a relative slowdown in some other developed economies, such as those in Europe.

But data released on Monday showed price gains are now effectively at the Fed's target.


This assessment was supported by this week's Personal Consumption Expenditures Index which rose to 1.9 percent in March, the highest since February 2017.

And the uptick has jarred financial markets, which fear the Fed will have to raise rates at a faster pace, possibly three more times this year, rather than the two increases previously expected.

Last night the Fed acknowledged rising inflation, which...

Expectations of faster-than-expected rate rises in the US, as well as a rapid covering of positions by investors short on the dollar, has sent the greenback to its strongest level since mid-January.

The economy is now in its second-longest expansion since World War Two.

The country's unemployment rate is now at a 17-year low of 4.1 per cent.

Trade relations between the United States and China have already been strained as Trump has weighed imposing tariffs on up to $150 billion of Chinese imports. Fed policymakers had flagged the potential negative impact of the conflict in recent public comments, but adopted a wait-and-see attitude.

The Federal Reserve kept its benchmark interest rate unchanged Wednesday but noted that inflation is nearing its 2 percent target rate after years of remaining undesirably low.

Asian shares slipped as hopes waned for real progress in Sino-U.S. trade talks, which are due to kick off on Thursday.

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