by Howard Schneider and Ann Sapphir

Washington (Reuters) – The American Federal Reserve (FED) decided on Wednesday to maintain its guiding rates, but it warned increased risks regarding inflation and unemployment, increasing the economic prospects when it must deal with a policy by Donald Trump which continues to evolve, especially on customs duties.

The economy as a whole has “continued to develop at a solid pace”, said the Fed in its monetary policy press release, attributing the contraction of the US gross domestic product (GDP) in the first quarter to record imports, businesses and households that havetened to anticipate the entry into force of new import taxes.

The job market has also remained “solid” and inflation has remained “somewhat high,” the FOMC said – the Fed monetary policy committee – after a two -day meeting. This message takes up the same terminology used in the previous declaration of the Central Bank.

Wednesday’s press release, however, highlights emerging risks that could place the Fed in front of difficult choices in the coming months.

“The uncertainty about economic prospects has increased further,” insists the FOMC, whose members unanimously decided to maintain the objective of the central bank’s reference rates in a range of 4.25% to 4.50%.

“The committee is attentive to the risks that weigh on both aspects of its double mandate and believes that the risks of an increase in unemployment and inflation have increased,” it added in the press release.

Powell justifies wait -and -see

Speaking at the press conference that followed the Fed announcements, its president, Jerome Powell, noted that “despite increased uncertainty, the economy was still in a solid position”.

He also underlined the need for the Fed to be agile, even if the United States is in a situation in which it is impossible to anticipate. “We believe that the current orientation of monetary policy leaves us well positioned to respond in a timely time to potential economic developments,” he said.

Jerome Powell also noted that the commercial policy of the American administration was still a source of uncertainty, which justifies the choice of the Fed to opt for a wait -and -see position.

“I do not think we can say (…) How things will evolve,” he said, adding that there is “a lot of uncertainty, for example, on how policies in terms of customs duties will be implemented”.

At Wall Street, immediately after the Fed announcements, the Dow Jones and S&P 500 indices have briefly increased their earnings, while the Nasdaq Composite reduced its losses. At the end, the Dow Jones won 0.67%, at 41.103.69 points, the S&P 500 0.41% to 5,629.75 points and the NASDAQ Composite 0.26% to 17,735.09 points.

The yield of American treasury bills at ten years has accentuated its withdrawal, yielding to the fence nearly 4 base points, at 4.281%. The dollar, already on the rise, was still appreciated, 0.60% against a basket of reference currencies.

The orientation of monetary policy will depend on the evolution of the risk identified or, in the most difficult case, on the simultaneous increase in inflation and unemployment, said the Fed, noting that it would then be forced to choose the most important risk to be compensated by monetary policy.

A lower labor market is likely to generally strengthen arguments in favor of a drop in rates, while higher inflation would require maintaining a restrictive monetary policy.

The labor market deemed decisive

“For the moment, the Fed remains in a wait -and -see position while waiting for uncertainty to dissipate,” said Ashish Shah, director of investments at Goldman Sachs Asset Management.

“The recent data on employment, better than that we feared, supported the position of wait-and-see of the Fed, and it is the responsibility of the job market to weaken enough for the softening cycle (Fed monetary) to resume,” he added.

The level of Fed guiding rates has been unchanged since December, while its officials are struggling to estimate the impact of customs duties wanted by Donald Trump. These surcharges have fueled the fear of higher inflation and slower economic growth this year.

During the last updating of the Fed economic projections in March, its officials planned to lower the guiding rates of half a percentage percentage by the end of the year.

(Howard Schneider and Michael S. Derby; Claude Chendjou, edited by Jean Terzian)

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