Federal Reserve leaves interest rates unchanged

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As widely expected, Federal Reserve policymakers left interest rates unchanged following a two-day meeting that concluded Wednesday.

Eurozone inflation for April printed below market expectations, while in the United Kingdom, a purchasing managers index for services also came in under the consensus forecasts.

The post-meeting statement tweaked its language on inflation to note year-over-year inflation "is expected to run near the Committee's symmetric 2% objective over the medium term".

After the March meeting, Fed Chairman Jerome H. Powell said a number of policymakers had brought up US trade policy in their discussions and that business leaders in their regions had said trade policy was "had become a concern going forward".

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USA stocks moved higher immediately after the Fed's announcement. It downplayed a recent slowdown in economic and job growth, saying the activity had been expanding at a moderate rate and job gains, on average, had been strong in recent months. Job gains remained strong, while growth in household spending moderate from its strong Q4 pace. The meeting itself was seen as nothing more than prepping market participants for a 25-bps rate hike next month, when the next Summary of Economic Projections is released.

The release of the Fed statement overshadowed the release of a report from payroll processor ADP showing private sector employment increased by slightly more than anticipated in the month of April. Some analysts think the Fed may signal then that it foresees four hikes for 2018, up from the three it predicted in March.

Analyst Omer Esiner of Commonwealth Foreign Exchange said "the Fed showed no signs that it plans on speeding up its pace of monetary policy tightening". The Fed's preferred "core" inflation measure, known as PCE, which filters out volatile food and fuel prices, was within spitting distance of the Fed's 2 percent target in March. The 2-year had earlier risen above 2.52 percent, a more than nine-year high. Fed forecasts show rates peaking above 3 per cent in 2020 - higher than the central bank's estimate for the likely level of the rate in the longer term.

Two factors may indicate the dollar's rise, which is potentially damaging to the world economy due to its pre-eminence as a global funding currency, has more room to run.

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Under Powell's predecessors, Yellen and Ben Bernanke, the board endured criticism from some Republicans over its decision to pursue a bond purchase program created to cut long-term borrowing rates and to leave its key rate at a record low near zero for seven years.

However, a breakthrough was viewed as highly unlikely, especially as the USA embassy said the delegation would leave as early as Friday evening. Investors have placed 40% odds of a rate hike in December, but 41.9% expect the Fed to stay the course and enter 2019 with a target range of 2% to 2.25%, according to the CME FedWatch Tool.

A sustained turn in inflation above this 2% target, or even a sustained period of inflation hitting this target, could change the Fed's policy outlook in the coming years.

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