COMMENT-Fed to hold rates, keep focus on inflation target

The Federal Reserve is expected to hold rates at 5.25%-5.50% at this week's policy meeting. The U.S. central bank is also likely to repeat that rates will not be reduced until it has gained confidence inflation is moving towards its 2% target.

The focus is on Fed Chair Jerome Powell's comments as sticky inflation data has been complicated by a slowdown in first-quarter growth.

Preliminary Q1 U.S. GDP data released last week was below expectations, growing an annualized 1.6% versus the Reuters poll forecast for a 2.4% rise.

Meanwhile, the PCE price index rose 0.3% in March, in line with forecasts. In the 12 months through March, PCE inflation advanced 2.7% against expectations of 2.6%.

Powell will likely repeat that policy rates may remain higher for longer but should still stick to his base-case scenario for inflation to ease and rates to come down later this year.

He may also indicate fewer rate cuts this year than the three 25 basis-point cuts indicated by the median dot plots in the March Summary of Economic Projections.

Yet expectations of a rate hike appear highly premature. Though a near-term reversal of the recent sell-off in U.S. Treasuries is unlikely, the 10-year yield will likely top out near 5%.

The Fed may ultimately find it opportune to cut rates once inflation eases towards 2.5%, rather than sticking rigidly to the 2% target. Evidence of a cooling job market and slowdown in wage growth would necessitate an earlier rate cut to keep the economy stable.

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