Federal Reserve holds rates, on track for June interest rate hike

Federal Reserve holds rates, on track for June interest rate hike

Federal Reserve officials Wednesday held their key interest rate steady despite rising inflation and fears of a global trade war triggered by President Trump's tariffs. The US dollar index is now trading below where it started trading yesterday.

The Fed, in a statement released after its two-day policy meeting, offered nothing to dispel market expectations that it will deliver its second rate increase of the year when it meets in June.

E-Mini futures for the S&P 500 traded flat, with overnight results from Kraft Heinz, Tesla and Spotify in focus.

However, there are other factors at play today that put pressure on Asian stock markets and currencies.

"The risk at the moment is that the increasing uncertainty could create ambiguity in executives' heads, it makes corporate decision-making more hard and then (leads to) a decline in investment", Alastair George, chief investment strategist at Edison Investment Research, said.

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Edison's George added that the impact from trade tensions was hypothetical at the moment, though.

"It's holding back the market from responding more positively to the corporate data we're seeing", said Anwiti Bahuguna, senior portfolio manager at Columbia Threadneedle Investments in Boston.

USA stocks briefly moved higher after the Fed's announcement but gave up gains amid concerns about worsening trade relations between the United States and China.

The dollar has been buoyed in recent weeks by the strong USA economic outlook and rising yields amid signs of a slowdown in some other developed economies, especially in Europe. The blue chip CSI 300 was up 0.8%, but not far from an eight-month low hit in April.

U.S. stocks fell on Wednesday as investors digested a statement from the Federal Reserve, which left interest rates steady and said inflation had "moved close" to its target, while the dollar climbed late against a basket of currencies.

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This statement is a far cry from concerns that the recent tax reform would generate higher inflation and force the Fed's hand in the pace and scale of interest rate hikes.

And so in making this change, Fed officials are acknowledging that inflation is getting closer to its target.

"That debate is going to be ongoing", said Michael Schumacher, director of rate strategy at Wells Fargo, after the Fed statement was released.

At the end of the day, the FOMC is still expecting further gradual increases in the fed funds rate. That said, some interest rate hiking activity should still be expected as things stand now.

Comments from the Fed were "possibly disappointing for dollar bulls", but the main reason for the euro's resilience on Thursday was profit-taking after the dollar's rapid move higher, said Jane Foley, currencies strategist at Rabobank. They introduced the word symmetric to the statement, allowing markets to understand that they may tolerate somewhat higher inflation.

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Immediately following the data, the US Dollar slipped back versus the Euro and the Japanese Yen, with the Dollar Index (DXY) dropping from 92.67 ahead of the FOMC decision to as low as 92.25. By 13:00 pm local Jakarta time the rupiah had weakened 0.19 percent to IDR 13,975 per United States dollar (Bloomberg Dollar Index). Spot gold was up 0.4 percent at $1,309.34 an ounce at 1302 GMT.

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