The US Federal Reserve has left rates unchanged at its May meeting as expectation builds for June hike

Rebecca Smith
Fed chair Janet Yellen signalled a cautious outlook on economic growth and coming rate hikes in March
Fed chair Janet Yellen signalled a cautious outlook on economic growth and coming rate hikes in March (Source: Getty)

The Federal Reserve has voted not to raise its key interest rate today, following hikes in December and March.

The Federal Open Market Committee said it was maintaining the target range for the federal funds rate at 0.75 to one per cent.

The US central bank said it felt the recent slowdown in US growth will likely be temporary, noting that while household spending growth had expanded "only modestly" of late, the "fundamentals underpinning the continued growth of consumption" were still solid.

Following a two-day meeting, the Fed said:

The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labour market conditions will strengthen somewhat further, and inflation will stabilise around two per cent over the medium term.

US economic growth slowed to an annual rate of 0.7 per cent for the first quarter of the year and the expectation was that the Fed would hold interest rates steady, 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.

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Investors next foresee an interest rate rise in June, according to Fed futures data compiled by the CME Group.

Neil Wilson, senior market analyst at ETX Capital, said today’s meeting has "left the door open to a rate hike in June, although not explicitly”.

"If the Fed really is to hike in June, and market pricing suggests it is, we can expect various Fed officials to get wheeled out over the coming weeks to start talking up the prospect in order to smooth the path for the hike," Wilson added.

Along with no obvious hint on the June hike, the Fed did not mention the balance sheet reduction.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said:

The statement makes it very clear that the Fed does not take the reported slowdown in Q1 growth seriously.

In short, they have not changed their view that the economy can take a 'gradual' increase in rates, which will be needed to prevent an overshoot of the inflation target as the labour market tightens. We continue to expect a 25bp hike in June.

The dollar extended early gains, while Wall Street stayed lower following the Fed decision.

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

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