Treasuries higher as US Federal Reserve stays put on rates

The US central bank kept its main policy settings unchanged, as it waited for greater clarity on the new administration's fiscal plans, according to economists.

Since its last meeting, activity in the jobs market had continued to strengthen and economic activity to expand at a moderate pace, the Fed said.

However, unlike at its previous meeting in mid-December, rate-setters pointed out how measures of consumer and business sentiment had improved of late.

Regarding prices, inflation was still below the Fed's 2.0% target, the Fed said, adding that "market-based measures of inflation compensation remain low."

"Near-term risks to the economic outlook appear roughly balanced," the Fed also reiterated in its statement.

Monetary policymakers in Washington DC thus kept the range for the Fed funds rate at between 0.50% and 0.75%, as expected.

In an immediate reaction, as of 1917 GMT the yield on the benchmark 10-year US Treasury note was up by three basis points at 2.48% having hit an intra-session high of 2.52% earlier in the same trading session.

Nonetheless, the yield on the more policy-sensitive two-year note was higher by one basis point to 1.22%, versus the 1.24% at where it had stood roughly a quarter of an hour before the announcement hit the wires.

Meanwhile, Fed funds futures were left discounting a 71% chance that interest rates would be raised by 25 basis points at the June Federal Open Market Committee and 49% odds of a move in May.

Just as in December, the FOMC said that "economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data."

Wednesday's decision was the first under the new Trump administration and saw four new members of the Federal Open Market Committee take their seats.

Trump fiscal plans in focus

Commenting on the FOMC's policy statement, Ian Shepherdson, chief economist at Pantheon Macroeconomics told clients: "Curiously, the FOMC has dropped the December reference to market-based measures of inflation expectations having "moved up", even though TIPS break-evens have risen further and are now above 2%.

"At the same time, though, the statement is more blunt on the inflation outlook. Previously, inflation was "expected to rise to 2% over the medium term"; now, "inflation will rise..." The section on monetary policy is unchanged. Overall, we view this statement as a very small nudge towards the next rate hike, but action in March will come only if the next two labor market reports are strong and we have a clear (ish) idea of the likely extent and timing of fiscal easing."

For his part, Paul Ashworth, chief US economist at Capital Economics, said: "Even if we get more insight into the specifics of [Trump's] proposed stimulus in [his] speech to a joint session of Congress in late February, it will be another few months after that before it becomes clear whether or not both Houses of Congress support the plan. Until that time, the Fed won't want to commit itself to a more aggressive pace of interest rate hikes, particularly not when inflation is still running slightly below its 2% target.

"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. However, as the stimulus boosts economic growth and particularly inflation, we then anticipate a much more aggressive second half of the year, with three rate hikes taking the fed funds target range to between 1.5% and 1.75% by end-2017."