Consumers Should Prepare for Higher Interest Rates

Federal Reserve officials were unusually explicit in their statement, released yesterday following a two-day meeting in Washington, indicating that a disappointing first quarter wouldn't knock the committee off its path to raise rates two more times this year after a hike in March.

While the central bank was widely expected to hold interest rates, investors were eyeing any hints on the pace of future rate hikes. Still, consumer spending and factory output have slowed, and inflation remains below the Fed's target rate.

"We don't expect that will prevent the Fed from hiking interest rates again at the June meeting, at least not as long as employment growth rebounds in April and May", said Paul Ashworth, chief USA economist at Capital Economics in Toronto.

Benchmark 10-year notes last fell 5/32 in price to yield 2.3144 percent, from 2.296 percent late on Tuesday.

The Federal Reserve has left its benchmark interest rate at a still-low level near 1 percent while signaling that it expects a resilient USA economy and solid job market to justify higher rates later this year. Prices for USA government bonds were trading lower, while the dollar was marginally lower. However, the government report also showed that gasoline demand fell 2.7 percent over the last four weeks from the same period a year ago. A slowdown by consumers was a major reason overall economic growth slowed so sharply over the winter.

But if either inflation or inflation expectations edge too much lower, expect the dovish chatter to begin returning from some of the Fed's more influential quarters.

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After sliding lower following Wednesday's Federal Reserve statement, gold remained on the defensive in Europe on Thursday. The Trump administration last week proposed a tax plan that includes cutting the corporate income tax rate to 15 percent from 35 percent, but offered no details.

The core PCE is the Fed's preferred inflation measure. However, the language in its monetary policy statement was not enough to convince traders that a June rate hike was off the table.

The U.S. added just 98,000 net new jobs in March, the fewest in a year, although economists said weather was probably a factor.

"The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal", the central bank said in a statement.

Economists have largely attributed the weak first-quarter GDP reading to recurring issues with the calculation of growth during the January-March period and linked the pullback in hiring to weather.

US consumers cut back sharply on buying durable goods such as autos in March, leaving overall spending unchanged for a second straight month.


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