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FOMC leaves interest rates unchanged, one month after historic rate hike

Economic IndicatorsJan 27, 2016 02:07PM ET
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The Federal Reserve held its benchmark Fed Funds Rate at 0.25-0.50% on Wednesday afternoon

Investing.com -- The Federal Reserve, as expected, left short-term interest rates unchanged on Wednesday, reaffirming their plan to tighten monetary policy gradually after approving their first rate hike in nearly a decade last month.

Citing weaker global and domestic growth, as well as high volatility in financial markets, the Federal Open Market Committee (FOMC) voted to hold its benchmark Federal Funds Rate at its current level between 0.25 and 0.50%. On December 16, the FOMC abandoned a seven-year zero interest rate policy, aimed at lifting the U.S. economy out of the Great Recession, by implementing a modest hike of 25 basis points.

Since the historic meeting, many analysts have downgraded their global macroeconomic outlook, as the continual downturn in oil prices and the weakest annual GDP growth in China in a quarter century has stoked fears of a worldwide slowdown. Although the U.S. labor market has grown at a steady pace over the last three months, long-term inflation, the second leg of the Fed's dual mandate, remains far below its objective. Last month, the U.S. Department of Labor reported that its Consumer Price Index (CPI) for all items declined 0.1%, slightly below forecasts for a flat reading. Meanwhile, the Core Personal Consumption Expenditure (PCE) index, hovered at 1.3% in November, sharply under the Fed's targeted goal of 2%. The Core PCE index, which strips out volatile food and energy prices, is the Fed's preferred gauge of inflation.

In one notable change, the FOMC removed a phrase that it is "reasonably confident" inflation will move toward its 2% objective from the statement. The minutes from the December FOMC meeting showed that the Fed does not expect long-term inflation to reach the target until 2018.

Also in December, the Fed projected that the upper range of the Fed Funds Rate will reach 1.4% by the end of 2016, suggesting the possibility of up to four rate hikes this year. On Wednesday, the CME Group's (O:CME) Fed Watch tool placed the implied probability of a 25 basis point hike by the FOMC in March at 26.7%, when the U.S. central bank is scheduled to meet next. Heading into the release, the odds of a March rate hike, according to the CME Group, were fairly higher at 30.3%.

Over the last month, the FOMC has employed two instruments, Overnight Reverse Repurchase Operations or reverse repo's and interest payments on excessive reserves held at the New York Fed, to help stabilize the Fed Funds Rate. Minutes before the statement was issued, the Fed Funds Rate stood at 0.38%, up considerably from an average rate of 0.13% one year ago.

The Dow Jones Industrial Average fell by more than 100 points in the minutes following the release to 16,069, down 98.20 or 0.61% on the session, while the S&P 500 Composite index fell slightly to 1,898.91, down 4.30 or 0.20% on the day. Both indices extended the losses in the final hour of trading, closing the session down 223 and 20 points respectively.

The relatively dovish statement had little impact on the U.S. Dollar Index, which fell by percentage points to 99.06, down 0.05%. EUR/USD inched up to 1.0880, up 0.10%, extending modest gains from earlier in the session.

Yields on the U.S. 10-Year fell mildly to 2.011%. Minutes before the release, bond yields on U.S. 10-year Treasuries stood at 2.043%, up four basis points on the day.

FOMC leaves interest rates unchanged, one month after historic rate hike
 

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