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Abu Dhabi, UAEFriday 14 December 2018

US Fed keeps interest rates unchanged as inflation remains close to target

The Fed gave no indication that plans to veer from the path of gradual interest-rate increases

A screen on the floor of the New York Stock Exchange shows the rate decision of the Federal Reserve, on Wednesday. Richard Drew / AP Photo
A screen on the floor of the New York Stock Exchange shows the rate decision of the Federal Reserve, on Wednesday. Richard Drew / AP Photo

Federal Reserve officials left interest rates unchanged, acknowledging that the inflation is close to the target and did not indicate any intention to veer from their gradual path of interest-rate increases.

“Inflation on a 12-month basis is expected to run near the committee’s symmetric 2 per cent objective over the medium term,” the policy-setting Federal Open Market Committee said in a statement on Wednesday in Washington. “The committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.”

Officials may have signaled their willingness to allow inflation to exceed their 2 per cent goal somewhat by adding a reference to the “symmetric” nature of their target.

The FOMC also noted the weakness in growth in the first quarter, removing a reference in the in March statement that the economic outlook had “strengthened in recent months.” They balanced that out by noting strong growth in business investment.

The yield on 10-year US Treasury notes slipped slightly to 2.96 per cent following the release of the statement, while the S&P 500 Index of US stocks climbed to its highest level of the day and the Bloomberg Dollar Spot Index fell.

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The US economic growth cooled in the first quarter to an annualised pace of 2.3 per cent after averaging higher than 3 per cent in the previous three quarters.

The decision to maintain the federal funds target range at 1.5 per cent to 1.75 per cent was a unanimous 8-0.

The Fed’s commentary is unlikely to change investor expectations that policy makers will raise interest rates for the second time this year when they re-convene in June.

Officials left unchanged their view that near-term risks to the economic outlook appeared “roughly balanced.” That suggests policy makers are not ready to steepen dramatically the path they’ve projected for slowly raising rates.

The Fed lifted its benchmark rate three times last year -- while also beginning to slowly trim its balance sheet. Officials indicated in March they expect a total of three or four hikes in 2018.

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 per cent target after being below that goal for almost every month since April 2012.

Policy makers aim to keep inflation near target while ensuring maximum sustainable employment and preserving a US economic expansion that is now the second longest on record.

Year-on-year growth in the personal consumption expenditures price index reached 2 per cent in March, up from 1.7 per cent in February. The jump was driven more by year-ago price drops in telecoms and pharmaceuticals than by recent price gains.