Fed stays put on rates, but amid divisions

Monetary policymakers in Washington DC kept the target for the Fed funds rate at between 0.25% to 0.50%, as had been widely expected by economists, although some market commentators had cautioned that the possibility of a rate hike could not be completely dismissed.

Significantly, three of the Federal Open Market Committee's members, Esther George, Loretta Mester and Eric Rosengren dissented from the decision to keep rates unchanged.

In its post-meeting statement, the Federal Reserve described recent job gains as "solid, on average" while inflation had continued to run below the monetary authority's congressionally mandated target of 2.0%.

"The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives," the statement also read.

During her press conference, Fed chair Janet Yellen noted that the FOMC's decision did not reflect a lack of confidence in the economy.

Another phrase from the Fed chair during her conference which caught some observers' attention was: “Since monetary policy is only modestly accommodative, there appears little risk of falling behind the curve in the near future.”

According to the Summary of Economic Projections, the presidents of the Fed's regional banks and the members of the central bank's board lowered their median forecast for the Fed funds rate at the end of 2017 from 1.6% to 1.1% and for 2018 from 2.6% to 1.9%.

She also employed the same line of reasoning that Fed governor Lael Brainard did in her last speech to justify the decision to stay put.

That is to say, if the Fed needed to raise rates because inflation was rapidly moving higher, that would be easier to accomodate than to ease policy enough should premature tightening lead to undue weakness in the economy.

Yellen saw one rate hike in 2016 if labour market gains continued and no new risks appeared.

As of 2033 BST, the dollar/yen was still sharply lower, changing hands at 100.55 and down by 1.28% after having registered gains earlier in the same session.

In parallel, the yield on the benchmark 10-year bond yield was off by four basis points to 1.66% even as that on the two-year note was just a tad higher at 0.7784%.

"The minutes will shed more light on the intensity of the debate, but three dissenters in favor of a rate hike (among them usually dovish Eric Rosengren) already speak a clear language.

"In addition, the statement was perceptibly more hawkish. It reintroduced the language that the near-term risks to the outlook “appear roughly balanced”, an assessment that had been dropped from the statement in January, and highlighted that “the Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives,” said Dr. Harm Bandholz, chief US economist at UniCredit Research.

For their part, Barclays Research's Michael Gapen and Rob Martin said: "[...] with three members dissenting against the decision and three, presumably different, members calling for no further rate hikes this year, the committee is more split than it has been at any time in our memory.

"This split in views will make FOMC communication and action increasingly difficult this year. In particular, we believe that this level of dissent will make it difficult for the committee to keep the possibility of December rate hike live in the minds of market participants and, indeed, households and businesses."