US Fed keeps interests on hold

Following a two-day meeting of its rate-setting Federal Open Market Committee (FOMC), the US central bank decided on Wednesday to hold the overnight lending rate it charges to commercial banks at a target range of between 0.25 and 0.50 percent.

In December, the Fed lifted the benchmark interest rate for the first time in a decade from near zero, but signaled more caution in raising interest rates over concerns that a slowing Chinese economy could depress global growth, sparking stock price declines and tighter financial market conditions.

On Wedenesday, the Fed said in a statement that global economic headwinds remained on its radar, but it removed a specific reference to the risks they posed.

"The committee continues to closely monitor inflation indicators and global economic and financial developments," it said.

After the last policy meeting in March, Fed Chair Janet Yellen told a news conference that "caution is appropriate" when it comes to raising rates. Since then, markets have turned up, with the United States' S&P 500 shares index up by more than 14 percent. China's economy has also shown more positive signs, growing at an annualized 6.7 percent pace in the first quarter.

The global situation has already caused the Fed rate setters to dial back their estimates on the number of rate rises this year. Predictions from policymakers now project two rises, compared to four expected as of last December.

Eye on US data

The central bank also noted that while growth in household spending had moderated, households' real income had risen at a "solid rate" and consumer sentiment remained high.

Inflation has picked up recently, but the Fed said it was expected to remain low in the near term, in part because of earlier declines in energy prices. It remained confident inflation would rise to its 2 percent target over the medium term.

Estimates are that the world's biggest economy grew at a pace of only 0.9 percent in the first quarter, down from 1.4 percent at the end of 2015. Data released Tuesday showed the industrial sector still weak, with durable goods orders up just 1.4 percent year-on-year in the first quarter, and consumer confidence slightly lower.

But at the same time, the US jobs market continues to tighten and persistently strong job growth is expected to keep boosting consumer spending, so most forecasts for the second and third quarters are much stronger.

Additionally, some of the pressures that have kept inflation lower than the Fed's target have abated. Oil prices have rallied, with the Brent benchmark crude up 20 percent since the Fed's December rate hike. Also, the US dollar has dropped around 4 percent against a basket of currencies during the same period, meaning it has digested the December rate hike.

How the FOMC weighs that against upcoming risks to the economy, particularly the Brexit vote on June 23, will be crucial in determining how often the Fed will raise interest rates later this year.

uhe/nz (Reuters, AFP)