Fed Holds Rates But Smoothes Path To Next Rise

The US central bank has kept interest rates on hold but cleared the way for a future rise, citing domestic economic strengths while rowing back on its warnings surrounding world growth.

The Federal Reserve's statement, following its latest monetary policy meeting, highlighted an improving domestic jobs market even though the economy slowed in the first quarter of the year.

While, at the same time, it held back on its previous warnings about risks to US growth from the world economy, the Fed insisted it would continue to monitor developments closely.

Its broad message seemed to indicate that market expectations of a rate rise in June - following on from the first increase in more than nine years in December' - remained on the cards.

But the rate-setting committee gave no hints of a likely path, with the benchmark rate currently standing at 0.25-0.5%.

It (Other OTC: ITGL - news) had previously pledged to tighten monetary policy only gradually - when economic and financial conditions allowed.

The Federal Open Market Committee (FOMC) - led by Fed chair Janet Yellen - has several concerns including slowing global economic growth.

Earlier on Wednesday, the UK produced its first calculation of GDP growth for the first quarter of the year indicating an easing to 0.4% growth from a figure of 0.6% in the previous three months.

Estimates suggest the US economy grew at an annualised pace of only 0.9% in the first quarter, down from 1.4% in the final three months of 2015.

Recent data has shown the industrial sector remains weak with exporters suffering the effects of a strong dollar.

Consumer confidence and retail sales have also fallen.

But at the same time the US jobs market has continued to strengthen - with a jobless rate now of just 5%.

That jobs growth is tipped by economists to boost spending in the economy in this quarter and the next.

The FOMC's rate vote was not unanimous, with one dissenting vote out of its ten members.

Chris Williamson, chief economist at financial information service Markit (NasdaqGS: MRKT - news) , said: "The Fed’s issue is finding the right window to hike rates, and telegraphing that intention early enough to not unsettle the markets.

"June looks a distinct possibility but it will require the data flow to improve in May."

Market reaction to the Fed's statement was muted as the decision to hold rates was widely expected though US stocks climbed into positive territory and the dollar was slightly higher versus the pound and euro.