Fed holds interest steady

The US Federal Reserve, in a widely expected move on Wednesday, left interest rate unchanged at 1.50-1.75 per cent, acknowledging that inflation is near its 2 per cent target.

The central bank also signalled that the gradual path of rate hikes will stay. However, it downplayed the recent slowdown in economic and job growth.

The Fed’s preferred inflation gauge, the personal-consumption expenditure price index, rose to a 12-month rate of 2%, hitting its annual target for the first time in a year and raising concerns that policy makers may be forced to increase rates at a faster clip than the two or three additional increases anticipated in 2018 to tamp down runaway price climbs. Rising inflation is bad for bonds because it chips away at its fixed payments, while higher rates undercut demand for existing government debt, pushing yields up, as market participants anticipate richer yielding debt in the future.

And so, how the Fed characterized inflation in its statement was key to watch. Its 2% target is symmetric, meaning it would be equally as problematic if inflation lingers too far above or below that level. It also means the Fed would be comfortable with allowing inflation to run above 2%, since it’s not a ceiling.

The Fed’s comments on the labor market were also of interest. Its statement said, as it did in March, that the labor market “continued to strengthen.” When the April jobs report is released on Friday, economists forecast it will show that nonfarm-payroll additions picked up from just 103,000 in March, according to Bloomberg.

The policy-setting Federal Open Market Committee lifted fed-funds futures rates in March and targeted two more hikes this year. The market is now on board and is pushing yields higher. Many investors think the Fed will ultimately move rates up three more times this year. The market has priced in over 40% chance of such an outcome.

U.S. government bond rates also have climbed as investors have expected greater issuance amid an expanding federal budget deficit.

On Wednesday, the Treasury Department announced increases to auctions across the bond market. It said it would issue a net $75 billion of debt, $101 billion than their previous forecast. This comes after the report that the government had borrowed on net $488 billion, a record for any such period.

Meanwhile, global trade discussions, which could also become a factor for rising prices, were in focus as a delegation, including Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer, was set to go to Beijing to discuss softening trade tensions between China and the U.S.