Fed says slowdown in US growth is temporary

The Federal Reserve said on Wednesday it believes the recent slowdown in US growth is likely to prove temporary as it stayed on course for a further increase in short-term interest rates as soon as June.

The US central bank kept its target range for the federal funds rate at 0.75 per cent to 1 per cent following its latest two-day meeting. In a statement, policymakers led by chair Janet Yellen acknowledged that household spending growth had grown “only modestly” lately, but they emphasised that the “fundamentals” behind consumption growth remained solid.

US economic growth slowed to an annual rate of just 0.7 per cent in the opening quarter of the year, and core inflation has subsided marginally even as the jobs market continues to progress towards full employment. The Fed lifted rates by a quarter point at its March 15th meeting and signalled that it expects a total of two more increases in 2017.

The US dollar and Treasury yields held on to their gains after the Federal Reserve said the first-quarter growth slowdown is probably “transitory,” potentially setting the stage for a rate rise this summer.

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In its latest statement, the Federal Open Market Committee 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 2 per cent over the medium term.”

Going into Wednesday’s meeting the markets were putting the chances of another quarter-point rate rise in the June 13th-14th meeting at more than 66 per cent, according to an analysis of futures trading from CME Group.

– Copyright The Financial Times Limited 2017