Fed leaves rates unchanged, citing lack of inflationary pressure

Federal Reserve officials on Wednesday decided to keep interest rates steady, as the absence of inflationary pressure outweighed an economy that is also experiencing strong growth.

The central bank has maintained its benchmark target between 2.25% and 2.5%, meeting market expectations, but perhaps disappointing President Donald Trump, who earlier this week urged the Fed to cut that rate from 1%.

Trump cited the lack of inflation as one of the main reasons for a rate cut and said on Tuesday in two tweets that economic growth would be much stronger if the Fed relaxed policy.

Instead, the Federal Open Market Committee on Policies voted unanimously to maintain the current lineup. However, the committee made a technical adjustment to keep the funds rate closer to the mid-point of the target range.

Interest paid on excess reserves that banks retain from the Fed will now be set at 2.35%, or 0.05 percentage point lower than before. Prior to two similar adjustments last year, the Fed had simultaneously raised the funds rate and the reserve ratio, the latter acting as a ceiling for the benchmark rate.

However, the funds rate had reached the peak of its range, trading recently at 2.45%. Banks currently hold $ 1.56 trillion from the Fed, with an estimated surplus of $ 1.41 trillion.

In its vision of the economy, the Fed changed some of the wording of the statement after the March meeting to indicate that growth remains strong.

This week's statement said that "economic activity has grown at a steady pace," while noting that job gains "have been strong" and that the unemployment rate "has remained low" . The unemployment rate stands at 3.8%, the lowest level in 50 years.

On the critical issue of inflation, the statement said that "market-based inflation compensation measures have remained weak in recent months".

The committee proposed another linguistic trick reflecting dull inflation.

"On a 12-month basis, overall inflation and inflation for other products that food and energy have decreased and are less than 2%," the statement said. After the March meeting, the committee blamed weak inflation for lower energy prices.

This decision follows a much stronger economic performance in the first quarter than most economists expected. GDP increased by 3.2%, defying forecasts that predicted little or no growth.

In addition to a weak February, the labor market was also dynamic. Economists predict that the non-farm payroll will increase by around 180,000 in April; the report will be released on Friday.

Financial markets also performed well. The Dow Jones Industrial Average index has now risen by about 14% in 2019, following a catastrophic catastrophe near 2018, sparked by market fears about the continued tightening of the Fed.

Inflation, however, remained well below the Fed's 2% symmetric target. The preferred indicator of the central bank showed only a 1.6% gain in March excluding volatile prices for food and energy.

Trump and other White House officials believe that low inflation opens the door to greater flexibility. Markets, meanwhile, believe that the Fed should remain stable for some time, then badign a probability of 67% rate reduction by the end of the year.

The Fed is loosening its policy slightly. Starting on Thursday, the committee lowered the ceiling on Treasury revenues that will come out of the balance sheet during the month. Up to $ 30 billion has been allowed to roll, a level that will now grow to $ 15 billion.

At present, the Fed's balance sheet does not exceed $ 3.9 trillion, most of which is comprised of Treasury securities and mortgage-backed securities. The decommissioning effect will remain at $ 20 billion a month.