Fed holds interest rates steady, downplays first quarter economic weakness

Slowing auto sales weigh on US stocks as indexes wobble

USA economic data have turned south just in time for the Federal Reserve to conclude its May meeting Wednesday, when Wall Street expects the central bank to maintain interests rates at between 0.75% and 1.00%.

FED WATCH: Investors expect the Fed to keep the benchmark US interest rate on hold this month but are looking to a post-meeting statement for signs of when the next increase might come.

The wording of the Fed's policy statement strengthens the prospect of two more increases in the benchmarket lending rate this year, likely at the June and September meetings.

"The Fed is doing a very good job of pre-warning the markets under Yellen and they will have to talk up the growth prospects and show that the Q1 (first quarter GDP) number was indeed transitory". The CME Group's FedWatch tool says futures markets indicate a 66 percent chance of a hike in June.

AUTO SLOWDOWN: U.S. auto sales fell 4.7 percent last month, the most pronounced slowdown of the year and a strong indication that 2017 will end seven straight years of growth.

Money markets are now pricing in a 93% chance of an interest rate hike at the Fed in June. Business fixed investment "firmed," the central bank noted.

The Fed has penciled in two more rate hikes this year.

The Personal Consumption Expenditures (PCE) price index, which tracks the value of goods and services purchased by individuals, fell 0.2 percent in March in its first drop since February 2016 and its biggest decline since January 2015.

The Fed has only raised interest rates three times in the last decade, most recently in March this year. Wednesday's statement underlined sentiment that the Fed will raise rates gradually. While that was the smallest gain since October, it roughly matched expectations of economists surveyed by Reuters.

Markets are now giving a fairly high probability for a rate increase next month, although this could change if incoming U.S. economic data softens.

This action, if it holds, is indicative of a bond market that sees the Fed hiking the United States into recession.

The Fed statement showed little concern about a recent softening in inflation, describing it as "running close to the committee's 2 percent longer-run objective".

As of the March 15 statement, Fed committee members anticipated maintaining this policy "until normalization of the level of the federal funds rate is well underway".

Noticeably absent from the Fed's announcement were changes to the Fed's balance sheet, the details of which are expected to be exposed in the meeting's minutes which will be released on May 24.

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