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Fed votes unanimously to hold rates

The Federal Reserve kept interest rates unchanged on Wednesday, a widely expected move given uncertainty surrounding US fiscal policy.

After its two-day policy meeting, the Federal Open Market Committee unanimously voted to hold the federal funds rate between 0.50% and 0.75%, citing progress in labor market growth.

“Job gains remained solid and the unemployment rate stayed near its recent low,” the central bank wrote in its statement. “Household spending has continued to rise moderately while business fixed investment has remained soft. Measures of consumer and business sentiment have improved of late.”

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The Fed also reiterated its balance of risks statement, noting, “near-term risks to the economic outlook appear roughly balanced,” meaning that the economy is no more likely to surprise to the downside than the upside.

The Fed’s cautious, yet generally positive, economic statement follows a slew of improving data, including better-than-expected ISM manufacturing growth, strong consumer confidence reports and solid payroll gains. The unemployment rate has hovered around 5% for the past year—a level many economists consider to be near full employment. However, output growth slowed in the fourth quarter, with real GDP estimated to have increased only 1.9%.

Inflation, which has run below the Fed’s 2% target for years, has started to show signs of improvement. After the election of Donald Trump, inflation expectations surged as investors priced in prospects of new tax cuts and fiscal spending. The personal consumption expenditures index, the Fed’s preferred measure of price inflation, increased 1.6% in December from the year before, as core inflation rose 1.7%. In its statement, the Fed noted that “inflation will rise to 2 percent over the medium term.”

According to Paul Ashworth, chief US economist at Capital Economics, the neutral statement fits with his view that, “The Fed will remain in wait and see mode until it gets more clarity on the size, composition and timing of the fiscal stimulus being planned by the Trump administration… On balance, we still expect the fiscal stimulus to be passed by June. In that environment we see the Fed waiting until its June meeting before it raises its policy rate again.”

In December, the Fed raised rates by 0.25%, the second such increase in a decade, as Fed officials projected three quarter-point rate hikes this year.

Market expectations for a March rate hike are 17%, with the majority of traders forecasting at least two rate hikes by the end of the year.

The redline version of the statement is below.