Fed leaves rates unchanged but signals future hikes

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ANALYST'S TAKE: Chris Weston of IG said in a report that economic indicators for the USA have been underwhelming of late, so that leaves open the risk that the Fed may look to lower expectations of a hike in June.

The Australian dollar reversed earlier gains to trade at $0.7425 in the late USA session, after briefly popping up to $0.7466.The Aussie gained on Tuesday after the Reserve Bank of Australia (RBA) kept rates unchanged at a record low of 1.5 percent at its policy meeting and sounded a touch more upbeat about global growth, reinforcing expectations of a steady rate outlook.

Meanwhile, on the jobs and inflation front, the Federal Reserve said that the labour market has continued to strengthen, as job gains were "solid" in recent months, while inflation continued to run somewhat below 2%.

Most economists say the Fed likely will stay the course and hike twice more this year, probably in June and September, despite a weak batch of economic indicators since it last raised rates in March.

Overnight, the Federal Reserve kept its benchmark rate unchanged at 0.75-1% on Wednesday.

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The Federal Open Market Committee downplayed signs of weakness in the USA economy this year, saying it "views the slowing in growth during the first quarter as likely to be transitory" while inflation was running close to its target and consumption "remained solid".

The Federal fund interest rate peaked in the early 1980s at almost 20%.

"Near-term risks to the economic outlook appear roughly balanced".

However, some officials had also said they wanted more data in hand before taking additional steps to normalize rates.

However, he said he expects the next rate hike to come at the July meeting, rather than June, "when the Fed will have the first reading on second quarter growth".

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"The FOMC is not overreacting to the mediocre economic data received in recent months", Long said. The core 12-month measure also slowed, falling to 1.6 percent from 1.8 percent. He added that the Fed will be watching negotiations over a USA tax plan and that if economic data don't worsen and tax-deal prospects remain in tact, the market would likely price in a June increase in the Fed's interest rate.

The advance estimate of U.S. first-quarter real GDP growth was only 0.7 percent, as released by the U.S. Bureau of Economic Analysis on April 28.

The Fed's dual message was that while now isn't the time to resume raising rates, the economy remains durable enough to withstand further increases soon. The unemployment rate fell from 5.2% to 4.9%, which was the lowest since March 2009.

At the same time, the Fed showed no uncertainty about the economy "or hesitation over the path of policy", Barclays added.

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