Fed calm over 2% inflation shows hikes will be gradual


After a two-day meeting, Fed monetary policymakers voted 8-0 to keep the central bank's benchmark short-term rate at between 1.5 percent and 1.75 percent even as they noted inflation now is running near the central bank's target.

The Fed recognizes the recovery in growth and the rise in inflationary pressures.

Since March 2017, the Federal Open Market Committee has used that word in every post-meeting statement to emphasise it won't react more severely if inflation is above its target rather than below. However, the recent weakness is likely to be temporary and we think that the EUR and the GBP are likely to bounce back: EUR/USD to $1.20-1.22 levels and GBP/USD to $1.39-1.41 levels by June-end as political and economic concerns return in the US and growth gains momentum in Europe.

The biggest development in the statement, however, was a tweak in the Fed's language with respect to inflation.

The statement showed the central bank's confidence over inflation, acknowledging that core inflation rate have moved close to the central bank's 2-percent target.

The Fed has a goal of 2% price inflation.

Similarly, sterling seemed to have left behind its Brexit-related worries due to expectations of two interest rate rises this year by the Bank of England. The U.S. dollar was down to 0.9953 Swiss franc from 0.9964 Swiss franc, and it fell to 1.2830 Canadian dollars from 1.2848 Canadian dollars.

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In the bond market, Treasuries were higher, but little-changed, with the 2-year yield right at 2.5% and the 10-year sitting at 2.96%.

It rose to as high as 92.57 on Tuesday, its firmest since January 10.The index rose above its 200-day moving average for the first time in a year, triggering a wave of short-covering.

Another reason for the market's wariness was the Fed's acknowledgment of some recent softening of the economic data - with consumer spending slowing notably in the first quarter - but it remained steadfast in its outlook for gradual interest rate increases. The Fed also removed a sentence from the March statement which said, "The economic outlook has strengthened in recent months". Singapore is not seen as being as sensitive to higher United States interest rates in comparison to its regional peers, which does provide some light behind why the Singapore Dollar is trading somewhat higher against the USD after the FOMC statement.

The FOMC next meets in June, when it is widely expected to raise the key rate by 25 basis points to two percent. "The market is still a bit too long euros and remains vulnerable", she said.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.

"Inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term", according to the FOMC.