US Government Bonds Edge Higher Ahead of Fed Decision

Ann Santiago
May 3, 2018

The euro rose off four-month lows on Thursday as the dollar's recent rally came to a halt after the Federal Reserve did little to alter market expectations for further interest rate rises this year.

The Fed's preferred Personal Consumption Expenditures price index hit the central bank's two-percent target in March for the first time in almost a year, while "core" PCE inflation, which excludes volatile food and energy prices, was 1.9 percent.

Analysts at ING said the market moves "may reflect a hint of disappointment that the Fed were not more upbeat on the economy and the threat of inflation".

In recent months, investors have debated whether the Fed, which has said it expects inflation to pick up, will accelerate its pace of rate increases to prevent the economy from overheating. The Federal Reserve noted inflation had moved up but said its two percent target was "symmetric", indicating there was margin to fluctuate above or below that level.

Investors are next focused on Friday's USA employment report for April for further indications of the strength of the economy and inflation pressures.

Payroll gains in the U.S. probably picked up in April, with the unemployment rate forecast to drop to 4 per cent, according to surveys of economists before the data reports due Friday.

The Fed's overall confidence in the economic outlook was also highlighted by its assertion that business fixed investment had continued to grow strongly.


Last week, government economists estimated that USA gross domestic product grew in the first quarter of 2018 at an annual rate of 2.3%.

"Markets are pretty much focused on the symmetric language, that's kind of code for willing to let them overshoot their inflation target", said Mark McCormick, North American head of fx strategy at TD Securities in Toronto.

The eight-member FOMC had raised the funds rate in March.

At a news conference after the central bank's previous meeting in March, Powell had said, "We're trying to take the middle ground, and the committee continues to believe that the middle ground consists of further gradual increases in the federal-funds rate". A year ago, the 10-year yield was just 2.3 percent.

On the other hand, rising trade tension between the U.S. and its partners are clouding the picture for central bankers.

Despite Trump's complaints during the presidential race that the Fed was aiding Democrats in keeping rates ultra-low under President Barack Obama, his choices for a chairman and for other slots on the Fed's board have been moderates rather than hard-core conservatives who would favor a faster tightening of credit.

Inflation is a growing concern as businesses are starting to raise prices.

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