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Federal Reserve upbeat on U.S. economy but holds rates

11 May 2017

The Federal Reserve remains in the midst of its monetary tightening cycle, and plans to gradually raise interest rates from the near zero levels it maintained for almost seven years until late 2015.

U.S. economic growth slowed to an annual rate of just 0.7 per cent in the opening quarter of the year, and core inflation has subsided marginally even as the jobs market continues to progress towards full employment.

The FOMC raised the federal funds interest rate in March from 0.75 to 1 percent.

While it gave no explicit direction, the committee pointed to a resilient jobs market - with unemployment running at 4.5% and pay growth rising - coupled with inflation "running close" to its 2% target, as evidence the economy remained strong despite weaker-than-expected first quarter growth.

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While there is ongoing debate that President Trump's tax and infrastructure proposals could force the Fed to raise rates faster, it's unlikely any of those policies will have a real impact on the economy this year.

Eurozone economic growth rate remained stable in the first quarter, preliminary flash estimate from Eurostat showed Wednesday. Most economists expect it to do so again when it next meets in mid-June.

The Federal Reserve struck a familiar tone in its statement concerning interest rates, pointing out that interest rate increases will be gradual in 2017, and highlighted that growth in economic activity had slowed in the first quarter, while household spending rose "only modestly".

Analysts and traders widely expected the Fed to leave rates unchanged and keep to a forecast of two more potential hikes this year.

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Economists have largely attributed the weak first-quarter GDP reading to recurring issues with the calculation of growth during the January-March period and linked the pullback in hiring to weather.

This is really important because the Fed views both core inflation and inflation expectations, especially market-based ones, as particularly good predictors of future inflation.

"The main takeaway is full steam ahead" with rate hikes, said Kathy Bostjancic, head of USA macro investor services at Oxford Economics. Fed Chair Janet Yellen doesn't have a press conference scheduled after this meeting, but she and at least five other Fed officials are scheduled to speak on Friday, giving policy makers a chance to explain their decision more fully if they so choose.

At its prior meeting in March, the Fed chose to make a decision on when to shrink the balance sheet by the end of the year, according to the minutes of the meeting. The Fed simply repeated it plans to hold the balance sheet steady until "normalization of the level of the federal-funds rate in well under way".

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Federal Reserve upbeat on U.S. economy but holds rates