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    Fed slightly more cautious as it keeps rates on hold

    The Federal Open Market Committee concluded its two-day policy meeting today and kept interest rates unchanged as expected at its first policy decision of the year. In December, the FOMC decided to raise the federal funds rate for the first time since 2006, increasing it by 25bps to a range of 0.25-0.50%. A tightening labor market and a sustained economic recovery since the financial crisis had prompted the Fed to start the normalization of interest rates even as inflation remains near zero so that the process would be a gradual one.

    Since then however, oil prices have continued their sharp descent and concerns over global growth has caused widespread volatility in financial markets that has wiped billions from global stock markets. The Fed appeared to acknowledge the recent events in its statement, saying the Committee is “closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation”.

    There were also some concerns on the outlook for the US economy as growth slowed towards the end of last year. The Fed pointed to soft next exports and slower investment inventory as dragging on growth, and described household spending and business fixed investment in recent months as only “moderate” after judging them as “solid” in the December statement.

    The labor market was once again the biggest bright spot with “some additional decline in underutilization of labor resources” since the last meeting. But inflation is expected to remain at current low levels in the near term as energy prices continue to fall. The statement repeated what Fed Chair Janet Yellen had emphasized in the December press conference that the Committee will “carefully monitor actual and expected progress toward its inflation goal”. This signals only gradual increases in the fed funds rate and that the actual path will be data dependent. However, it is still unclear just how gradual the increases will be with forecasts ranging from four rate hikes to just one this year.

    Markets were muted in their response to the Fed’s statement with US stocks heading down after the announcement. The dollar dropped after the statement release as the Committee sounded a tone of caution and wait-and-see approach to future rate hikes. The euro jumped above 1.09 dollars from around 1.0860 dollars. Against the yen, the dollar had spiked to 119.07 just before the announcement but fell back to 118.57 yen in late US session.

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