Fed likely to leave rates alone but signal more hikes coming

The US Federal Reserve is expected to hold interest rates steady after concluding its two-day meeting on Wednesday, but it might focus on future rate hikes, which would reduce demand for non-interest bearing gold.

The Fed also said that it expected the first-quarter's slow economic growth to speed up later in the year.

The U.S. dollar rallied broadly on Wednesday and hit more than six-week highs against the yen after the Federal Reserve signaled it was still on track for two more interest rate hikes this year.

The Fed is in its first cycle on increasing rates since 2006 - a quarter percentage point boost each in December 2015, December 2016 and March.

"The Fed's soothing words about the recent soft patch in the economic data signals they still believe gradual rate hikes are appropriate later this year", said Chris Rupkey, chief financial economist at Mitsubishi UFG Financial Group in NY. Today, policymakers showed they were willing to look past the weak March payrolls number. The Markit/CIPS UK Construction Purchasing Managers' Index (PMI) rose to 53.1 from 52.2 in March, against forecasts of economists for a slight fall.

IBD'S TAKE: Just as Wall Street seems to be reining in its expectations for the economy, surging income and employment taxes are signaling that wage gains may have shifted into higher gear.

Going into Wednesday's meeting the markets were putting the chances of another quarter-point rate rise in the June 13th-14th meeting at more than 66 per cent, according to an analysis of futures trading from CME Group.

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"The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation".

Despite only modest gains in household spending, the statement said, "the fundamentals underpinning the continued growth of consumption remained solid". Business fixed investment firmed.

The labor market also has shown signs of weakness.

"The FOMC views the slowing in growth during the first quarter as likely to be transitory", the statement said, in unusually dismissive language. "Near-term risks to the economic outlook appear roughly balanced". The Committee continues to closely monitor inflation indicators and global economic and financial developments.

The weak US auto sales figures could make market participants wary of actively buying the dollar against the yen for now, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.

The decision leaves the benchmark short-term fed funds rate in a range of 0.75% to 1%. However, now through the summer, the Indian market could take a breather, he added.

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