Fed Expects Inflation Pressures to Heat Up This Year


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The U.S. Federal Reserve ended its two-day meeting by announcing it would not raise its benchmark interest rate. However, it indicated that it expects inflation pressures to heat up as the year moves on.

The decision by the Federal Open Market Committee to leave interest rates at 1.25 to 1.50 percent was widely expected. This decision had almost no impact on the markets. However, investors were looking at the statement for clues on how the central bank might proceed for the rest of the year. This was going to be the news that moved the markets.

According to projections released in December, FOMC officials expect three rate hikes this year so long as there is no significant disruption to market conditions. Recent price action in the Treasury markets, however, suggests that investors may believe the Fed is considering a fourth rate hike.

Today’s Fed statement contains a few tweaks which could influence the market’s view on the timing and the number of future rate hikes.

“Inflation on a 12-month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term,” the statement said. “Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.”

The Fed’s language towards inflation differed from the December statement, which noted that core and headline measurements “have declined” and were “running below 2 percent.”

Additionally, this week’s statement pointed out that “market based measures of inflation compensation have increased in recent months but remain low,” a tweak from December which simply noted that the measures “remain low.”

Finally, the FOMC removed language that discussed the effects that the violent storm season had on economic activity. Officials had not expected the storms to have long-range impacts on growth but did note that there would be effects over the near-term.

The decision not to hike rates passed unanimously. This was also Janet Yellen’s last meeting as the Chair. She will now had over the reins to Jerome Powell.

Following the release of the Fed’s statement, Treasury yields rose, sinking U.S. Treasurys. The yield on the benchmark 10-year Treasury note rose to 2.75 percent. This helped underpin the dollar while pressuring gold prices. U.S. equity markets were mixed with the cash S&P 500 Index turning negative after giving up its earlier gains.

This article was originally posted on FX Empire

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