Published: Sun, May 07, 2017
Markets | By Erika Turner

Forex New - Dollar rises after hawkish FOMC; rates unchanged as expected

The statement suggested the Fed is keeping its options open for more rate hikes this year, maybe preparing for a move as soon as June.

A statement from the Federal Reserve said: "In view of realized and expected labor market conditions and inflation, the Committee made a decision to maintain the target range for the federal funds rate at 3/4 to 1 percent".

Investors who bet on the future path of the fed funds rate project the next rate hike occurring in June, according to CME FedWatch.

Fed officials have five more meetings left this year to raise, lower or keep interest rates at current levels.

The December 2016 hike was the central bank's first in a year, following a December 2015 hike that ended nearly a decade without rate increases.

The dollar traded below a six-week high against the yen on Wednesday, as the market awaited the Federal Reserve's policy statement for hints on the USA interest rate outlook, while the kiwi rose on the back of higher dairy prices, Reuters reported.

A minority of economists predicted the central bank might be less aggressive in raising interest rates, and wait until September before moving again.

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Investors now placed a 94 percent chance of a rate hike at the Fed's June 13-14 meeting, up from roughly 70 percent ahead of the release of the Fed's statement, according to an analysis of Fed funds rate futures.

While the rate of economic growth leaves much to be desired, at 0.7% annual pace in the first quarter, unemployment hit a 10-year low, at 4.5%.

The median forecast of Fed officials is for two additional quarter-point rate hikes this year.

The Fed statement said while household spending has risen only modestly "the fundamentals underpinning the continued growth of consumption remained solid". While acknowledging that the pace of growth in the US economy was slower than expected during the first quarter, Fed officials remained bullish on the country's economic prospects.

The language nevertheless runs counter to recent communication from Fed officials, who at the March meeting expressed substantial sentiment that more aggressive fiscal policy in Washington - lower taxes, less regulation and perhaps United States dollars 1 trillion in infrastructure spending - would boost growth. Yellen has said that the longer-run trend in labor force growth is between 75,000 and 125,000 per month, so anything faster than that soaks up any remaining slack.

Data showing the euro zone economy started the year with robust growth that far outstripped that of the United States had little effect on the euro, with analysts saying that the single currency - which hit its highest levels since early November last week - already had a lot of good news priced into it. Many say it will be a non-event since the Fed is not expected to make any changes to interest rates and there will not be a press conference.

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