Fed Notes Resurgent US Inflation, Leaves Key Rate Unchanged

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The Reserve Bank's next interest rate review is on May 10, the first for new governor Adrian Orr, when he is expected to keep intact its projection for rates to remain low for the foreseeable future.

As forecast the US Federal Reserve sat on its hands at its two day meeting in Washington, but sent hints that rates will rise again in coming months.

A look at the wording should ease at least some fears that Jerome Powell is just wanting to raise interest rates just for the sake of raising interest rates.

The Fed dropped language in previous post-meeting statements that said they were closely monitoring inflation. As expected, the Fed kept monetary policy unchanged but signaled its intention to raise rates later this year thanks to underlying strength in the U.S. economy.

The Fed's decision to leave its benchmark overnight lending rate in a target range of between 1.50 percent and 1.75 percent was unanimous.

The Fed's preferred measure of inflation soared 1.9 percent in the 12 months through March, the biggest increase since February 2017, after increasing 1.6 percent in the year through February, the US Commerce Department reported. Any undershooting of the 1.2% core inflation estimate could extend losses for the single currency today.

Spot gold was up 0.7 percent at $1,312.14 per ounce by 2:33 p.m. EDT (1833 GMT), while US gold futures for June delivery settled down $1.20, or 0.1 percent, at $1,305.60.

On the other end of the spectrum was Snap Inc, whose shares plunged 21.6 percent after the Snapchat owner fell short of Wall Street forecasts for revenue and regular users.

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The policy divergence is shown in bond markets where spreads between German yields and equivalent USA debt has blown out to its widest in three decades at 240 basis points.

The March inflation pick-up reflected in part the fading effect of steep cuts to mobile phone charges early past year. As expected ahead of time, there was no rate hike by the FOMC. In its March statement, the Fed indicated business investment had "moderated" from a strong fourth quarter. They introduced the word symmetric to the statement, allowing markets to understand that they may tolerate somewhat higher inflation.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.

The Open Market Committee expects "economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong", with "further gradual adjustments" in monetary policy.

Economists pointed to a comment from the Fed indicating that the annual rate of inflation is expected to run near its symmetric 2 percent objective over the medium term. It added that risks to the outlook appear roughly balanced, removing a prior reference to "near-term risks".

Committee members acknowledged that both inflation and core PCE (personal consumption expenditures) are now in range of the 2% target.

Traders in futures markets Wednesday morning, before the Fed announcement, placed a almost 49% chance of three more rate increases this year and have fully priced in one of those increases at the June meeting, according to CME Group. Currency markets mostly overlooked Wednesday's economic data out of the Eurozone in favour of broader trends, namely the widening interest rate differentials between the Euro-area and US.

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