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    Fed upbeat on jobs but September move uncertain due to low inflation

    The Federal Open Market Committee (FOMC) concluded its two-day meeting on Wednesday by keeping its policy unchanged. Markets were not expecting any changes but were hoping the Fed would provide stronger signals on the possible timing of an interest rate increase. With July being the last meeting before September, which is widely tipped as the most likely date for a rate move, investors were left disappointed on the lack of clear signals by the FOMC.

    While the Committee sounded more optimistic on the jobs outlook in its accompanying statement, it was less confident on the prospects of inflation moving closer to its target rate. The Fed cited improvements in household spending and the housing market as contributing to the moderate expansion in economic activity. But acknowledged that business fixed investment and net exports have been soft. However, it gave its strongest assessment yet on the labor market, saying that it is ‘nearly balanced’ with ‘solid job gains and declining unemployment’.

    But with inflation continuing to run below the Fed’s longer-run objective, the Committee were only ‘reasonably’ confident that inflation would move towards the 2% target in the medium term. Market expectations of inflation also remain low, suggesting that it may take longer than what the Fed anticipates for inflation to move closer to its 2% objective.

    The slightly more hawkish tone of the FOMC statement strengthens the likelihood of a rate hike at some point this year, but the chances of a September rise look slightly diminished. The Committee were pretty clear that only ‘some’ further improvement is needed in the labor market, leaving inflation as the main determinant for a rate decision. Inflation data in the coming weeks will therefore be closely monitored both by the markets and the Fed for further signs that price rises are on a more sustainable path upwards towards the 2% target in the medium term.

    The dollar was volatile after the statement release as it initially jumped against the euro to 1.1014 dollars per euro, then dropped to 1.1036 but has since gained in late US session to rise to 1.0981. Against the yen, it came just short of breaking the 124 handle at 123.98 and the pound was also weaker at 1.5604 dollars.

    Looking ahead, Thursday’s second quarter GDP data is unlikely to be a big mover for the dollar unless it comes in outside of estimates, while the initial weekly jobless claims will also be watched for any surprises.

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