US Fed keeps interest rates unchanged: Top highlights from policy review

It held its benchmark rate in a target between 2.25 per cent and 2.5 per cent, thus disappointing President Donald Trump, who earlier this week urged the Fed to cut the rate by 1 percentage point.

The Federal Reserve officials unanimously voted to keep interest rates unchanged in the target between 2.25 per cent and 2.5 per cent in the latest monetary policy review, that concluded on Wednesday. Moreover, the US Fed signalled little appetite to adjust them any time soon, citing strong job creation, ongoing economic growth, and weak inflation.  

“We think our policy stance is appropriate at the moment; we don’t see a strong case for moving it in either direction,” Federal Reserve Chairman Jerome Powell said in a press conference following the end of the central bank’s two-day policy meeting.

Following the policy announcement, the US stocks ended lower as comments from Fed Chair dampened rate cut hopes. The Dow Jones Industrial Average fell 163 points, or  0.61 per cent, to 26,430.14, the S&P 500 lost 22 points, or 0.75 per cent, to settle at 2,924, while the Nasdaq Composite dropped 46 points, or 0.57 per cent, to 8,050. 

Here're the top highlights from the latest FOMC meet outcome - 

Interest rates steady

The US central bank held its benchmark rate in a target between 2.25 per cent and 2.5 per cent, thus disappointing President Donald Trump, who earlier this week urged the Fed to cut the rate by 1 percentage point (ppt). 

Inflation a concern

The biggest concern flagged by the US Fed was the currently “muted” level of inflation, which continues to fall short of the Fed’s 2 per cent target. The US central bank said it still sees the weakness as the result of “transitory” factors, such as portfolio management services, lower apparel prices and airfares. “We suspect transitory factors may be at work,” Powell said, adding inflation should return to the Fed’s target over time, and then be symmetric around its objective.

“If we did see inflation running persistently below, that is something the committee would be concerned about and something we would take into account when setting policy,” Powell added. According to the most recent data, the US inflation currently stands at 1.6 per cent. 

Fed lowers interest paid on excess reserves

The Federal Reserve lowered its so-called interest on excess reserves rate, or IOER, by 0.5 percentage points to 2.35 per cent from 2.40 per cent. It said that it has lowered IOER to bolster its control over monetary policy, a technical adjustment that didn’t represent a shift in its efforts to influence overall economic growth.

US economy on a "good path"

Fed policymakers said ongoing economic growth, a strong labor market and an eventual rise in inflation were still “the most likely outcomes” as the US expansion nears its 10-year mark. “The labor market remains strong ... economic activity rose at a solid rate” in recent weeks, the Fed said in a policy statement, Reuters reported. 

Impact on India

"No change in interest rates for the present and possible rate cuts if inflation remains very weak in the USA can be a positive for FPI flows to the emerging markets including India. This will help to boost our capital account and counter the higher CAD due to higher oil prices," says a report from CARE Ratings.