The FOMC kept interest rates unchanged on Wednesday at the FED press conference and signaled it still plans two rate increases this year, saying it expects the U.S. job market to strengthen after a recent slowdown. The U.S. Dollar value increase versus other currencies in the foreign exchange market.
FED Interest Rates
The U.S. central bank, however, lowered its economic growth forecasts for 2016 and 2017 and indicated it would be less aggressive in tightening monetary policy after the end of this year.
Fed policymakers gave no indication of when they might raise rates, though their projections leave the door open to an increase next month.
“The pace of improvement in the labor market has slowed,” the Fed said in a statement. It added, however, that “economic activity will expand at a moderate pace and labor market indicators will strengthen” even with gradual rate increases.
Updated projections from Fed policymakers point to annual economic growth of only 2 percent for the foreseeable future, slightly lower than forecast at the March policy meeting.
Policymakers have been worried about potential weakness in the U.S. labor market and the possibility of financial turmoil if Britain votes next week to leave the European Union. The Fed statement on Wednesday made no reference to that vote.
“It’s as dovish as the Fed can get without actually cutting rates. Even (Kansas City Fed President) Esther George withdrew her dissent. The path of rates is lower, which is a big dovish swing,” said Brian Jacobsen, chief portfolio strategist at Wells Fargo Fund Management.
Financial markets all but priced out a rate increase this year after the Fed statement, and U.S. short-term interest rate futures contracts rose. U.S. stocks held on to their pre-meeting gains.
Fed Chair Janet Yellen is scheduled to hold a news conference at (1830 GMT)
FED Press Conference
The Fed left its target range for overnight lending rates between banks at between 0.25 percent to 0.50 percent, keeping on hold a campaign to lift borrowing costs that started late last year.
It raised rates in December for the first time in nearly a decade and signaled four increases were likely in 2016. Concerns about a global economic slowdown and volatility in financial markets subsequently reduced that number to two.
Although worries about the health of the global economy have eased, a sharp slowdown in U.S. hiring in May was unsettling. More recent data have indicated that last month’s jobs report may have been a blip.
The Fed statement said economic activity appeared to have picked up since April.
Economists polled by Reuters had seen virtually no chance that the Fed would raise rates on Wednesday. Most had expected it to do so in July or September on a view that the U.S. job market would bounce back and Britain’s EU referendum would not lead to a financial meltdown.
There were no dissents in the Fed’s rate decision on Wednesday.
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Janet Yellen Official FED Press Release
Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished. Growth in household spending has strengthened. Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, but business fixed investment has been soft. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Esther L. George; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo
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