Stocks slip, dollar drifts after Fed dents rate cut hopes

Ann Santiago
May 3, 2019

President Donald Trump had urged the Fed to cut rates by 1 percentage point this week because of low inflation.

The change isn't likely to be economically meaningful and instead reflects a technical effort to improve the way the Fed's policy decisions are implemented in overnight money markets.

The Fed will keep rates at 2.25 percent to 2.5 percent, stating the economy rose at a solid rate, but that inflation fell below its 2 percent target.

Investors had been betting on the Fed to signal an interest rate cut due to the recent bout of weak inflation in the US- but their hopes were dashed by Mr Powell's comments.

LONDON, May 2 (Reuters) - The dollar nursed overnight gains while Europe's share markets struggled early on, after the US central bank dampened bets that it might be readying its first interest rate cut in years.

"We think that our policy stance is appropriate at the moment".

In contrast, yields on higher-rated bonds such as Germany faced some upward pressure a day after the U.S. Federal Reserve signalled little appetite for hiking or cutting rates. As widely predicted, the central bank kept its interest rate target at a range between 2.25 percent and 2.5 percent.

Oil and metals markets added to the pressure on stocks as traders knocked copper to a 2-1/2 month low and used news of record USA oil production to cash in some of Brent's near 33 percent rise this year.

The U.S. Federal Reserve on Wednesday left interest rates unchanged and downplayed concerns about weak inflation, as the central bank saw no need to alter its "patient" approach on interest-rate moves.

Data since the March policy meeting show "the labour market remains strong and that economic activity rose at a solid rate", the FOMC said, somewhat more optimistic than the prior statement that noted slowing activity.

The meeting came after the Department of Commerce reported last week that the USA economy expanded at an annual rate of 3.2 percent in the first quarter, mostly driven by strong exports and private inventory investment.

"So ultimately, they will have to begin raising rates again to keep inflation contained".

With the first-quarter earnings season winding down, investors are looking for fresh catalysts such as U.S.

On inflation, the statement said: "Market-based measures of inflation compensation have remained low in recent months". The statement suggested a recent decline in inflation may be more persistent than expected, and was no longer to be blamed simply on falling energy prices.

"We suspect that some transitory factors may be at work", Powell said.

Fed fears over low inflation had been mounting, with Powell recently calling it "one of the major challenges of our time".

The Fed raised rates four times in 2018 and, as late as December, had anticipated further rises in borrowing costs this year.

The Fed also trimmed the amount of interest it pays banks on excess reserves to 2.35 percent from 2.4 percent in a bid to ensure that its key overnight lending rate - the federal funds rate - remains within the target band.

Asia trading had been thinned by holidays in Japan and China but Hong Kong and Korea's stocks gained after CNBC reported the USA and China could announce a long-awaited trade deal by May 10, as Chinese Vice Premier Liu He heads to Washington.

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