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Fed leaves rates unchanged; at least 3 hikes still expected this year

The federal funds rate remained unchanged after the Federal Open Markets Committee decided Wednesday to keep it at a range of 1.25% to 1.5%.

FOMC members noted in a statement a strengthening labor market and solid economic activity gains since their December meeting, but still low inflation, despite some increase in recent months of market-based measures.

Fed watchers are expecting a rate hike at the committee's March 20-21 meeting, which will include a press conference.

"They didn't need to do it today; they can wait until March," said Rich Piccirillo, senior portfolio manager at PGIM Fixed Income, in an interview.

The decision to not raise rates in January was unanimous. "The question is, if you hike in March, will there be dissent?" asked Mr. Piccirillo, who expects to see three or more rate hikes this year. "We are expecting some indication that would strengthen the language, that they are a bit more confident about inflation."

AllianceBernstein (AB) U.S. senior economist Eric Winograd noted that the committee upgraded the growth outlook to "solid" from "moderate" and had more concrete expectations for inflation moving up this year, despite saying that measures of inflation expectation remain low. "That's interesting because the five-year, five-year forward breakeven rate is, at 2.06%, the highest it has been in a year. Obviously, the committee expects (or) is targeting something more in line with the historic average closer to 2.5%," he said.

While the changes in the latest FOMC statement are incrementally more hawkish, "the lack of change in the balance of risks is dovish," said Mr. Winograd, who continues to expect four hikes this year.

Committee members also unanimously selected Jerome H. Powell to serve as chairman, effective Feb. 3, replacing Janet Yellen. He will be sworn in Feb. 5. "Chair Yellen's last meeting was uneventful. Chair Powell's first one will be more interesting," said Mr. Winograd.