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Strong US growth leaves Fed stuck happily on hold

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WASHINGTON: The Federal Reserve is expected to hold interest rates steady at its policy meeting this week as policymakers balance recent stronger-than-expected US economic growth against sluggish inflation.


Officials have given no signal in recent weeks of any change to the US central bank’s benchmark overnight lending rate, currently set in a range of 2.25 per cent to 2.50 per cent. Markets have bet heavily the Fed’s “patient” approach means just that — with rates on hold until a run of good or bad news about the economy provides a compelling reason to move.


Data compiled by CME Group put the odds the Fed leaves rates unchanged this week at 97 per cent.


“We do not expect a big change in tone,” compared to the Fed’s mid-March policy statement, with policymakers likely to be “more upbeat on growth, though with a more cautious reading of recent inflation developments,” JP Morgan economist Michael Feroli wrote in a preview of this week’s meeting.


The policy-setting Federal Open Market Committee is due to release its latest statement at 2 pm EDT (1800 GMT) on Wednesday after the end of a two-day meeting. Fed Chairman Jerome Powell will hold a press conference shortly after.


In the weeks since the Fed’s March meeting, most of the incoming US data has surprised in a positive way, diminishing the likelihood officials might be compelled to cut rates as President Donald Trump has demanded.


The gap in interest rates between different types of bonds, which narrowed in late March in what could be construed as a growing concern about recession, has since become larger as recession concerns eased.


Gross domestic product grew at an annualised rate of 3.2 per cent for the first three months of the year, comparable to last year’s pace.


The 3 per cent growth achieved in 2018 surprised many at the central bank, and in their March statement officials said they thought the economy had slowed in the first weeks of this year.


After adding a meagre 33,000 jobs in February, US employers added nearly 200,000 in March. The S&P 500 index also hit a new record high and US retail sales rebounded in March after a lull.


“The GDP figures are a testament to the economy’s resilience,” analysts at Oxford Economics wrote last week.


It is the type of data, in fact, that until a few weeks ago might have set the stage for an interest rate increase.


But a round of volatility in stock and bond markets late last year, coupled with weak inflation and signs of a global economic slowdown, prompted the Fed to change its plans for further hikes and shift to a strategy of staying on hold until something changes. — Reuters


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