US Fed holds interest rates steady, but signals cuts could come

US Fed holds interest rates steady, but signals cuts could come”

The BOJ is expected to keep its ultra-loose monetary policy unchanged but interest in markets will be on whether the Fed's dovish tilt would have any bearing on its Japanese counterpart.

The closely-watched Fed statement included a marked shift in language, no longer saying the central bank will remain "patient" in assessing economic data.

The central bank also said that because "uncertainties" have increased, it would "act as appropriate to sustain the expansion". Another interesting thing was that he said the Fed has not yet discussed whether rate cuts should be 25bp or 50bp.

It follows unprecedented pressure on Fed chairman Jerome Powell from US President Donald Trump, who believes rates are too high, harming the economy ahead of his bid for re-election.

But the projections did not reflect much change in the outlook for the economy - the median estimates for growth and unemployment were essentially unchanged compared to March, while the forecast for inflation was cut to 1.5% from 1.8% previously.

But it still represented a significant shifting of views on the Fed. Only one policymaker continues to see a rate hike as likely in 2019.

The US Dollar Index inched lower on these remarks and was last down 0.15% on the day at 96.48.

And despite so much gloom from Trump and many others, Powell remained surprisingly optimistic about the USA economy; consumer spending, which makes up three-quarters of the economy, had rebounded and remained strong, while job and wage growth was also firm.

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Yields on US Treasury securities, which had been modestly higher before the rate decision was released, slipped. Meanwhile, the dollar weakened against the euro.

For Canadians, the unusual new thing is that while the Fed chair talked to reporters about a US economy going off the boil, Canada's is showing renewed strength.

Trump said the decision by the ECB created an unfair advantage for the Eurozone economy, when contrasted to the USA economy which now has a central bank offering some of the highest interest rates in the developed world. The drop in inflation, however, was a blow for a central bank hoping to reach its target sometime next year.

Those actions caused Fed officials to change their tone from largely dismissing the macroeconomic fallout of Trump's trade policies to worrying that persistent new tariffs and shifting global supply chains could be emerging. Investors are betting on at least one interest rate cut this year, possibly as early as July.

"The economy's baseline outlook is good - sustained growth, a strong labor market and inflation near our objective", Fed vice chairman Richard Clarida said on Friday in an interview with Bloomberg Television.

The U.S. Dollar has taken another move lower in overnight Asia trade on news U.S. President Donald Trump was considering replacing U.S. Federal Reserve Chairman Jerome Powell.

Their account of the president's conversations emerged just hours after Powell said he intends to serve his full four-year term despite Trump's continuing criticism of Fed policy. This week, the Federal Reserve Bank of NY reported that an index it compiles of manufacturing in NY state plunged this month into negative territory - to its lowest point since 2016.

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