- US Federal Reserve holds interest rates steady, cites inflation as still too high; US dollar declined while the stock market surged but then retreated.
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The Federal Reserve maintained interest rates for a sixth straight time at its meeting on May 1. This kept the benchmark interest rate in the target range of 5.25 percent to 5.50 percent. The decision to hold interest rates, which was unanimous, was widely expected but there was nonetheless a strong reaction in the Forex and equity markets after the announcement.
The markets were expecting a hawkish message from the Federal Reserve as recent inflation releases have been hotter than expected and consumer price inflation (CPI) rose in February and March. Also, the March US nonfarm payrolls soared with a gain of 303,000, which was much higher than expected as the labor market remains robust. These releases have complicated the Fed’s attempt to bring inflation back down to the target of 2%.
Powell Says Inflation Too High, but No Plans to Hike Interest Rates
Fed Chair Jerome Powell focused on inflation in the rate statement and at the follow-up press conference. The rate statement noted that inflation had eased over the past year but “in recent months there has been a lack of further progress toward the Committee's 2 percent inflation objective” and that the Fed did not expect to lower rates “until it has gained greater confidence that inflation is moving sustainably toward 2 percent”. Powell reiterated at a news conference that inflation had stalled and that it would take longer than expected for the Fed to feel confident that inflation was falling closer to the 2% target.
Powell’s comments weren’t all hawkish, as he said that he expected inflation to resume its downward path and said it was “unlikely” that the next rate move would be a hike.
US Dollar Falls, Stock Markets Climb Briefly After Fed Meeting
Investors gave a thumbs-up to the prospect that the Fed still planned to lower rates and that a rate hike was unlikely. The US Dollar fell against the major currencies while the US stock market rose sharply higher after the announcement.
The USD/JPY currency pair showed the sharpest movement among the majors, dropping by a massive 2% on Wednesday, but has reversed directions on Thursday and is up 0.60% at the time of writing.
In the US, the major stock indices posted strong gains on Wednesday but could not hold these gains.
The S&P 500 Index climbed 1.3% after the rate announcement and hit a high of 5,088 but pared these gains and closed at 5,018, down 17 points (0.34%) on the day.
The Nasdaq 100 Index surged as much as 1.1%, hitting a high of 17,642 but then reversed directions and closed at 17,318, down 122 points (0.70%) on the day.
On Thursday, S&P 500 futures are up 34 points (0.67%) at 5080.
Nasdaq 100 futures are up 145 points (0.83%) at 17,583.
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