U.S. Federal Reserve Leaves Interest Rates Unchanged Despite President's Protests

Posted May 03, 2019

The policy statement, and particularly Powell's insistence the Fed saw no compelling reason to consider a rate cut in response to weak inflation, prompted a modest selloff in stock markets and pushed bond yields higher.

Though now expected by markets if confirmed, it would remove significant uncertainty that has weighed on markets and global data for a year now.

"We have the potential to go up like a rocket if we did some lowering of rates, like one point, and some quantitative easing", Trump wrote on Twitter.

Fed officials insist that the president's views will not influence their decisions on interest rates.

"Fed officials would likely worry about the risks that a rate cut could appear political or unnerve markets, which might mistake a cut in response to low inflation for serious concern about the growth outlook", Goldman Sachs analysts led by chief US economist Jan Hatzius said in a recent note. The IOER rate gives the Fed an additional tool for the conduct of monetary policy. "We of course will be watching very carefully to see that that is the case".

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US gross domestic product rose at a robust 3.2 percent rate in the first quarter of this year, beating market estimates of 2.3 percent. It was the best performance for a first quarter in four years, and it surpassed initial forecasts that annual growth could be as weak as 1% at the start of the year.

Excluding the volatile energy and food prices, the core personal consumption expenditures (PCE) price index, a preferred inflation gauge by the Fed, was up 1.3 percent in the first quarter, still below the central bank's target of 2 percent.

"Economic activity rose at a solid rate" in the past few weeks, the Fed said in a policy statement a day after US President Donald Trump called on it to cut rates by 1 percentage point and take other steps to stimulate the economy.

Trump repeatedly has criticized the central bank for keeping the rates high.

President Trump tweeted on Tuesday that the Fed "has incessantly lifted interest rates, even though inflation is very low" and should reduce them by 1 percentage point to help the U.S. economy "go up like a rocket".

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The Fed seemed to the markets yesterday having no will to change its adopted patience stance meanwhile shrugging off the increasing expectations of having interest rate cut by the end of this year.

In commodities markets, the drop in oil prices came after USA crude production output set a new record, though the losses were capped by the intensifying crisis in Venezuela and the stopping of Iranian oil sanction waivers by Washington.

The five Fed governors also voted unanimously to cut the rate paid to banks on excess reserves, which are those not required to meet regulatory requirements based on deposits, from 2.4 percent to 2.35 percent. If Powell can't find the right language to explain the Fed's moves, people might draw a number of conclusions, from assuming that the Fed has capitulated to the President's whims, to predicting that the economy is in trouble.

"We don't expect much further sustained depreciation of the Australian dollar", said Commonwealth Bank's chief currency strategist Richard Grace. "We don't think about short term political considerations we don't discuss them, and we don't consider them in making our decisions, one way or the other". And at subsequent meetings, they changed their guidance to indicate they likely would not raise interest rates at all in 2019.

Asia trading had been thinned by holidays in Japan and China but Hong Kong and Korea's stocks gained after CNBC reported the US and China could announce a long-awaited trade deal by May 10, as Chinese Vice Premier Liu He heads to Washington.

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After raising the key lending rate four times previous year, the Fed voted unanimously to keep it in a range of 2.25-2.5%. The U.S. dollar has also reversed and is now stronger on the day. -China trade developments and economic data.