The U.S. central bank held interest rates steady and in a statement following the end of a two-day policy meeting said that inflation had "moved close" to its target and that "on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term".
Since March 2017, the Federal Open Market Committee (FOMC) has used the word symmetric in every meeting statement to emphasize that it won't react severely if inflation is above its target. Currency markets mostly overlooked Wednesday's economic data out of the Eurozone in favour of broader trends, namely the widening interest rate differentials between the Euro-area and US.
The extra use of the word "symmetric" follows Monday's data release showing the central bank's preferred gauge of inflation had hit its 2 per cent target after being below that goal in nearly every month since April 2012.
- Germany's 10-year yield climbed two basis points to 0.58 percent, the largest surge in more than a week.
Last night the Fed acknowledged rising inflation, which... "We are seeing a roll-back of dollar selling since the start of the year". Risks to the economic outlook appear roughly balanced.
Data on Monday, however, showed that price gains are now near the Fed's 2 percent target.
This aligns with the expectations of the team at Capital Economics, who note that the Fed was always unlikely to signal a major shift at its May meeting, but that it doesn't change their forecast for a total of four rate hikes in 2018.
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"Despite rising trade tensions, more volatile financial markets, and poor weather, businesses are adding a robust more than 200,000 jobs per month", said Mark Zandi, chief economist of Moody's Analytics.
Many people, including Wall, still see the dollar failing to extend its recent surge, given the United States needs a weaker currency to fix its deficit and the Fed's awareness of the knock-on effects on developing countries of a rampant dollar.
It also kept alive bets it will announce a second hike this year at its next meeting in June. But the greenback later reversed course to trade higher. The euro was on a roll, with the European Central Bank looking set to roll back its economic stimulus in September and raise rates in the first quarter of 2019. We think this means there is a good chance we could see a rebound in Friday's nonfarm payrolls number following March's six month low.
MSCI's gauge of stocks across the globe shed 0.39 percent. Higher interest rates would help tamp down inflation but also could slow economic growth.
Tradables CPI, which includes goods and services that compete with worldwide rivals, fell 0.1 percent in the first quarter and slipped 0.4 percent on the year, keeping headline inflation near the bottom of the bank's 1 percent-to-3 percent range.
The policy divergence is shown in bond markets where spreads between German yields and equivalent USA debt has blown out to its widest in three decades at 240 basis points.