U.S. Fed keeps policy interest rates unchanged, likely to hike in March

The U.S. Fed kept its policy interest rates on hold today during its FOMC meeting, as was widely anticipated. The balance sheet policies were also kept unchanged. There were changes made to the FOMC statement, in line with expectation. The overall tone of the statement points towards a rate hike in March, noted Barclays in a research report. The statement’s main drive is to upgrade to the description of incoming data. The committee stated that the household spending and business investment spending “have been solid”.

This is about as solid a characterization in the domestic economy as the committee has had in the current recovery. This characterization of economy is viewed as the strongest signal that the committee expects to hike the target federal funds rate by additional 25 basis points in March; the economic growth has accelerated since the committee’s last meeting, stated Barclays. This backdrop would possibly lead participants to anticipate additional progress in labor markets, a return of inflation to 2 percent and more policy normalization.

Meanwhile, the committee continued to state that inflation remains below the target of 2 percent and those market-based measures of inflation compensation remain low. The committee stated it “expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate”.

“Without upgrading language elsewhere in the statement in reference to inflation or the balance of risks to the outlook, we do not believe this signals the committee has decided that four hikes are now appropriate”, stated Barclays.

According to Barclays, the language choice of the Fed is modestly hawkish.

At 20:00 GMT the FxWirePro's Hourly Strength Index of US Dollar was neutral at 6.29519. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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