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The monetary policy of the Federal Reserve had always been pivotal towards shaping the global economy and these days the impact is even amplified due to recent events taking place in several regions of the world. But recent policy statements released by the Federal Reserve suggested that there are various critical factors that are the focus of attention even though this might not have been the case previously.

According to recent statements by voting members at the the Federal Reserve, the data suggests that the interest rate will have to be maintained at 0.5%. As a response, the interbank rates witnessed a slight increase of 1 basis point to reach to 0.82%. However, the gap between these rates is still being considered quite considerable by the Federal Reserve.

Lack of Consumer Inflation

The main reason that the interest rate was kept unchanged in recent votes was the fact that inflation declined to 0.8% as compared to 1%, and this trend has been apparent in the Consumer Price Index (CPI) at 240 points. Although the lower inflation is causing a slowdown in the economy, its impact is, for the time being, is being absorbed by the GDP growth rate, which was most recently reported at 1.2%. This prompted the Reserve Bank to keep the interest rates stable without bringing additional changes to the market.

The Federal Reserve has estimated longer-term GDP growth rate to be in the vicinity of 1.2% to 2.0%. An important factor that contributed towards keeping the monetary policy unaltered was the continued showing of strength by the US Dollar itself. This has been seen in a wide swath of forex pairs. In the midst of the lukewarm global economic activity, the USA has performed better than most analysts expected earlier this year.

Labor Markets

Despite a slowing down of momentum in the labor market, the unemployment rate remained unchanged at 4.9%, and this is another factor compelling the Federal Reserve to keep the interest rates unchanged. Household and business credit has also remained steady since last year.  This came as we started to see renewed surges in non-farm payrolls data which reported at 255,000 — well above the market expectation of 180,000. If this is evaluated along with consumer confidence level that slightly improved to 90.4, it gives all the more reason for the Reserve Bank to keep the interest rate unchanged.  And this is something that could propel activity in the EUR/USD and GBP/USD.

There have been rumors based on some strong statements by voting members at the Federal Reserve which suggest that the interest rates might be increased in the next two-quarters — most likely by 25 basis points. This clearly indicates the tilt at Federal Reserve towards a stronger Dollar, which, according to their viewpoint, will bolster the economy. The US Dollar has been performing well against all the other majors, and another increase in interest rates would almost certainly result in another bull run.

By easyMarkets

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