ETFs to Consider Ahead of Fed Meeting

The US inflation measure most closely watched by the Federal Reserve hit the two percent annual target for the first time in just over a year the Commerce Department

ETFs to Consider Ahead of Fed Meeting

World stocks made little progress on Thursday as worries over global trade tensions weighed, while the USA dollar consolidated recent bumper gains after the Federal Reserve reaffirmed the outlook for more rate hikes.

"The market will have to get used to the fact that in order to prevent an economic overheating interest rates in the United States will continue to rise", Commerzbank analysts said, predicting that rate differentials between countries would have a greater bearing on currencies and could cement euro/ dollar around US$1.20.

The Fed's preferred Personal Consumption Expenditures (PCE) price index hit the central bank's 2 per cent target in March for the first time in almost a year, while "core" PCE inflation, which excludes volatile food and energy prices, was 1.9 per cent.

By adding "symmetric" to the inflation target, Fed officials might indicate that they would allow inflation to exceed the 2-percent goal somewhat, according to some analysts.

Similarly, sterling seemed to have left behind its Brexit-related worries due to expectations of two interest rate rises this year by the Bank of England.

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Other data last week showed that while USA economic growth slowed to an annualized rate of 2.3 percent in the first quarter, wages and salaries shot up 0.9 percent during the same period.

Bond investors are signaling that they expect a pickup in US inflation, having bid up the yield on the 10-year Treasury note last week above 3 percent before the yield settled just below that by week's end. Most Fed watchers foresee either two or three additional increases in the Fed's key rate by year's end, coming after an earlier hike in January. The recent upturn in PCE inflation can be read as a sign that upside momentum is bubbling.

In March, personal consumption expenditures (PCE) rose 1.9% over the prior year when stripping out food and energy. But if there's a grain of truth in the nowcasts, there's a reasonable possibility that inflation will remain at the Fed's target or move higher in the months ahead.

The Federal Reserve held interest rates steady and expressed confidence that inflation is moving closer to its target, leaving it on track to raise borrowing costs in June, Reuters reports.

The statement said the economy has been growing at a moderate rate.

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Friday's employment report for April will be evaluated for further indications of the strength of the USA labor market and inflation pressures.

"In view of realized and expected labour market conditions and inflation, the Committee chose to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 per cent".

The Fed also said risks to the economic outlook appear roughly balanced and reiterated its expectation that economic conditions will evolve in a manner that will warrant further gradual increases in interest rates.

"There are some changes in the statement to reflect the evolution of the data especially in their inflation outlook", said Stephen Stanley, chief economist at Amherst Pierpont Securities in Stamford, Connecticut. Inflation at two per cent is one of them, and the other is "maximum employment", which has never been defined but is thought to equate to an unemployment rate of about 4.5 per cent. It raised rates once in 2016, but lifted borrowing costs three times a year ago amid a strengthening economy and labor market.

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