US Fed leaves rates unchanged amid mixed economic signals

WASHINGTON – The US Federal Reserve left interest rates unchanged as officials weighed mixed signals on the health of the US economy and the impact of trade tensions.

The Federal Open Market Committee, the Fed’s policy-making committee, decided to maintain the target range for the federal funds rate at 2.25 percent to 2.5 percent, the Fed said in a statement after concluding a two-day policy meeting.

The central bank noted that the US labor market “remains strong” and economic activity “is rising at a moderate rate” since May, while indicators of business fixed investment “have been soft” and uncertainties about the economic outlook “have increased.”

“In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective,” the Fed said.

The meeting came as market participants are expecting the Fed to lower interest rates later this year, partly due to concerns about the rising costs of trade tensions and slowing global growth. US President Donald Trump has also repeatedly pressured the Fed to lower rates and boost economic growth.

“I would say there was not much support for cutting rates now at this meeting,” Fed Chairman Jerome Powell said Wednesday at a press conference, adding Fed officials would like to wait and see more data before moving rates.

“We felt that it would be better to get a clearer picture of things, and that we would in fact learn a lot about these developments in the near term,” he said.

“Ultimately the question we’re asking ourselves is are these risks going to be continuing to weigh on the outlook, and we will act as needed, including promptly if that’s appropriate, and use our tools to sustain the expansion,” he added.

James Bullard, president of Federal Reserve Bank of St. Louis, voted against Wednesday’s policy decision, arguing that the Fed should lower the target range for the federal funds rate by 25 basis points at this meeting.

Noting that the Fed dropped its commitment to being “patient” in its policy statement, Analysts believed the Fed had opened the door for a rate cut as soon as July.

“Fed gears up for rate cut in July. The mood within the Fed has clearly shifted. But, they prefer to keep their powder dry for the moment. Risks are now to the downside,” Diane Swonk, chief economist at Grant Thornton LLP, tweeted Wednesday.

Nearly 40 percent of economists expected the Fed to lower rates in July, while roughly 30 percent foresaw a rate cut in September, according to a survey released by The Wall Street Journal earlier this month.

Gold prices spiked during Asian trading hours on Thursday after a dovish U.S Federal Reserve opened the door to further rate cuts.

Spot gold prices surged to levels not seen in more than 5 years. As of 3:09 am ET Thursday, it was 1.62% higher at around $1,381.94 per ounce.

Gold futures also saw strong gains to $1,385.40 per ounce. They had earlier soared 3% to $1,397.70 per ounce, according to Reuters.

Following the Fed meeting, where the U.S. central bank left interest rates unchanged but opened the door for a possible rate cut in the future, the 10-year Treasury yield also slipped below 2% for the first time since November 2016 — breaching an important psychological level.

The benchmark note last traded at 1.9975%, as of 3:09 a.m. Thursday ET.

One economist told CNBC that the surge in gold prices were likely driven by the declines in yields of shorter-duration Treasurys ranging between three months and two years. The yield on the 3-month Treasury note trickled lower to 2.177%, as of 2:00 a.m. ET Thursday. The 2-year note dropped 2.01% to about 1.731%, as of 3:08 a.m. ET Thursday.

With expectations for the U.S. Federal Reserve’s funds rate to drop by 2020, gold has become “quite attractive” as a result, said Rob Carnell, chief economist and head of research for Asia Pacific at ING.

The shorter end of the yield curve tends to move in line with interest rate movements, meaning that a lower expected Fed funds rate will likely drive short term yields down. As the yields on the shorter-duration notes go down, gold becomes more attractive as an investment option due to its relatively higher yield.