Federal Reserve set to hold US interest rates steady as key measure of inflation softens

 
Jasper Jolly
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Policymakers at the Federal Open Markets Committee will announce their decision on Wednesday (Source: Getty)

The Federal Reserve is expected to hold interest rates steady when it meets on Wednesday after a key measure of inflation showed price increases moderating during March.

The personal consumption expenditures (PCE) price index dipped to an annual rate of 1.8 per cent in March, according to the US Bureau of Economic Analysis.

That was a dip from the 2.1 per cent inflation in the Fed’s preferred measure recorded in February. The US central bank aims for a symmetrical rate of two per cent PCE inflation.

Read more: Federal Reserve officials split over pace of rate rises

With inflationary pressures still subdued policymakers on the rate-setting Federal Open Markets Committee (FOMC) are thought to be unlikely to push for a further tightening of monetary policy at this meeting. Implied odds from federal fund futures show markets have priced in only a 4.8 per cent chance of a rate rise, according to CME Group.

The FOMC hiked rates only in March to the current target range of 0.75 to one per cent, but chair Janet Yellen signalled a cautious outlook on economic growth and coming rate hikes.

Minutes from the last meeting of the FOMC showed its members were split with regards to the outlook for rate hikes, with some pushing for more dovish policy, although they also showed discussion of the start of unwinding the Fed's $4.5 trillion balance sheet, another aspect of tighter monetary policy.

Read more: US growth falls to its slowest in three years

Some of the caution over rate hikes has since been supported by US GDP growth figures, which last week showed the economy slowing to an annual expansion of 0.7 per cent in the first quarter of 2017, the slowest pace in three years.

Pressure on the Fed to raise interest rates in response to stimulus plans from the administration of US President Donald Trump may also have lessened after a major tax plan disappointed investors with a lack of detail.

Nevertheless, the central bank is still going through a tightening cycle, with markets predicting a 70 per cent chance of an increase at the next meeting on 14 June.

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