Investing.com - The Federal Reserve left interest rates on hold on Wednesday, as widely anticipated, but signalled that inflation was nearing its 2% target, lining up a further rate hike at its next meeting in June.
The Federal Open Market Committee kept the overnight funds rate unchanged at 1.75% to 2.0% at the conclusion of its two-day policy meeting.
At its previous meeting in March, the Fed raised rates by a quarter point and projected two more rate hikes this year, although an increasing number of investors now see three hikes as possible.
The Federal Reserve stuck to its customary narrative of “gradual” rate hikes but acknowledged that inflation was nearing its 2% target, which further cemented investor expectations for a rate hike at the Fed’s next meeting in June.
“The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate,” the Fed said in a statement. “Inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term.”
Analysts said the Federal Reserve's carefully chosen language concerning inflation was a signal that policymakers were expecting inflation to run above target in the coming months but that shouldn't necessarily lead to aggressive monetary policy tightening.
"It's likely that PCE runs a little hotter than 2% over the remainder of the year, but policymakers appear to be trying to tamp down expectations that such a run would warrant a materially faster pace of rate hikes," CIBC said following the release of the statement on Wednesday.
The Fed's upbeat outlook on inflation comes as data earlier this week showed that the Fed’s preferred measure of inflation, the core personal consumption expenditures (PCE) price index excluding food and energy, rose 1.9% in the 12 months through March, just shy of the Fed’s 2% target.
Economic activity will expand at a "moderate pace" in the medium term, the Fed said, insisting that risks to the economic outlook appear "roughly balanced."
Ahead of the nonfarm payrolls report on Friday, the Fed expressed confidence in the labor market, anticipating conditions to remain "strong."
The labor market has gathered momentum in recent months as data last week showed that wages and salaries recorded their biggest increase in just over a decade in the first quarter.