Tue, Nov 12, 2019 @ 19:07 GMT

UK PMI services dropped to 53.5, back into slow lane

    UK PMI services dropped to 53.5 in July, down from 55.1 and missed expectation of 54.7.

    Tim Moore, Associate Director at IHS Markit, which compiles the survey:

    “The service sector moved back into the slow lane in July as business activity growth lost momentum for the first time since the start of spring. While it’s difficult to quantify the precise impact of the recent heat wave on overall business performance, some survey respondents reported that a combination of hot weather and the World Cup had weighed on consumer footfall. These short-term disruptions and a general slowdown in new business growth appear to have offset the boost to tourism-related activity from the extended dry period in July.

    “Looking at demand fundamentals, service providers commented that Brexit uncertainty had held back new project wins, reflecting risk aversion and a wait-and-see approach to investment spending among international clients.

    “Tight labour market conditions and rising wage pressures are also a key challenge for service sector companies, which contributed to the slowest pace of job creation since August 2016. Survey respondents are increasingly citing worries about the availability of suitably skilled candidates to fill vacancies, although this is also helping drive efforts to boost productivity across the service sector.

    “Meanwhile, input cost inflation eased back from June’s nine-month high, which helped to moderate the rate at which service sector firms increased their own charges. The combination of slower output growth and softer price pressures during July will reinforce expectations that any further Bank of England rate rises will be both gradual and limited.”

    Full release here.

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    BoE Carney: No-deal Brexit risks uncomfortably high, but we’re prepared

      BoE Governor Mark Carney said in a BBC radio interview that the risk of no-deal Brexit is “a relatively unlikely possibility but it is still a possibility”. And it would be “highly undesirable”. He added that “the possibility of a no deal is uncomfortably high at this point.”

      In case of a no-deal Brexit, there would be disruption in trade, economic activity and higher prices for a period of time. He emphasized that “our job in the Bank of England is to make sure that those things don’t happen. It’s relatively unlikely but it is a possibility. We don’t want to have people worrying that they can’t get their money out.”

      Nonetheless, he also noted that the financial system is robust and “banks have the capital, the liquidity that they need and we have the contingency plans in place”.

      But he also said “the UK has taken all the steps, all the secondary legislation it needs to. The European authorities still have some steps they need to take. We’re having conversations and we expect those to be addressed.”

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      Eurozone PMI services finalized at 54.3, points to 0.3% GDP growth in Q3

        Eurozone PMI services was finalized at 54.2 in July, revised down from 54.4. That compares to June’s final reading of 55.2. PMI composite was finalized at 54.3, down 0.6 from June’s 54.9.

        Among the countries, Germany PMI composite was a 4-month high of 55.0. France PMI composite was at a 2-month low of 54.4. Spain PMI composite hit 56-month low at 52.7.

        Rob Dobson, Director at IHS Markit said:

        “The final PMI numbers confirm the euro area economy started quarter three on a softer footing. July saw rates of expansion in both output and new orders cede the momentum recaptured in the prior survey month, returning to a picture of sliding growth rates seen through much of the year-to-date. “If the headline index continues to track at its current level, quarterly GDP growth over the third quarter as a whole would be little-changed from the softer-thanexpected expansion of 0.3% signalled by official Eurostat data for quarter two.

        “The outlook seems to be turning into a straight choice between the upturn being sustained at its current subdued pace or rising headwinds reining in growth further during the months ahead. On this front, downside risks are more prevalent, as the slower expansion in new order inflows during July was partnered by a tandem dip in business optimism to a 20-month low. Both are reflecting the uncertainty about global market conditions, especially given the ongoing rhetoric about trade wars and the potential spillover effects to the broader economy and to manufacturing in particular.

        “Improved domestic demand may offset some of this in the near-term, but will need to strengthen further if it is to maintain that role. The faster growth seen in Germany, if sustained, should also help in this regard, especially if it can aid in reversing the weaker expansions seen in its eurozone partners such as France, Italy and Spain during July. However, given rising signs of slowdown and the current uncertain outlook, the ECB will likely maintain its cautious approach to policy at present.”

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        BoJ minutes: No pronounced signs on improvement in trade tensions

          BoJ released minutes of the June 14/15 meeting today (not the one earlier this week). The discussions during this meeting were of much less important to the one on July 30/31, after which BoJ announced strengthening of the easing framework. Nonetheless, there were still some interesting points to note.

          One member questioned that BoJ’s credibility and commitment of achieving the 2% inflation target was undermined “because the description on the timing of reaching around 2 percent inflation had been deleted from the April 2018 Outlook Report.” And there communication strategy was a deeply discussed topic. There was consensus on emphasizing the bank’s commitment to achieving price stability.

          The minutes also noted the “sluggish growth in the CPI since the start of fiscal 2018”. Some members pointed to “short term factors” including Yen’s appreciation. Theses members also pointed to “increasingly competitive environment surrounding the retail sector”. Some members took a long-term perspective and attribute to ” the fact that the mindset and behavior based on the assumption that wages and prices would not increase easily had been deeply entrenched among firms and households.” One member said inflation was constrained by “social mode” which was brought about by “prolonged period of low growth and deflation”.

          On risks the minutes noted US economic policies, Brexit and geopolitical risks as the main ones. In particular, “a few members said that, although the U.S. protectionist trade policy had been criticized at international conferences such as the Group of Seven (G-7) meetings, there were no pronounced signs at the moment that the situation surrounding the policy would improve.”

          Full minutes here.

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          Near 50% of UK businesses not anticipating any Brexit contingency plan

            According to a survey by the Institute of Directors, only 31% of respondents are have carried out Brexit contingency plan. 8% have the plan implement already, 11% are drawing up the plans, and 12% have drawn up bot not implemented the plans yet. 19% of them haven’t even drawn up any plans even though the anticipate doing so. And 49% have no intention to do any Brexit contingency plans.

            From the figures, it looks like business are not to worried about the impact of Brexit and transitions on businesses. But Director-General of the IoD Stephen Martin has another interpretation. He said that firms have been “left in the dark” when it comes to the planning. And “the reality is that many companies feel they can only make changes once there is tangible information about what they are adjusting to.” And he urged that “as long as no deal remains a possibility, it is essential that the government steps up to the plate and provides advice on preparing for such an outcome.”

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            Very good advancement in bilateral US-Mexico NAFTA talk

              Mexico’s Economy Minister Ildefonso Guajardo met with US Trade Representative Robert Lighthizer in a bilateral NAFTA meeting yesterday. Guajardo said after the meeting that there is “very good advancement” in at least 20 items. But they have yet to discuss the stickier issues like the “sunset clause”. The meeting will continue on in Washington today.

              It’s believed that the differences between the US and Mexico have somewhat narrowed after leftist Andres Manuel Lopez Obrador’s victory in the presidential election on July 1. A large part of the convergence was in both sides’ push to raise wages for auto workers. There’s a change that both US and Mexico could agree on most of the items before letting Canada join in again to make it trilateral.

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              An update on GBP/CHF short

                Based on the position trading strategy noted in the weekly report, we’ve sold GBP/CHF on break of 1.2971 this week.

                Overall outlook is unchanged with the cross staying well below falling 55 day EMA. It’s also held well inside medium term falling channel from 1.3854. This decline fall from 1.3854 is expected extend to 61.8% projection of 1.3854 to 1.3049 from 1.3265 at 1.2768 as first target.

                There is prospect of further decline to 100% projection at 1.2460 before bottoming. But we’ll monitor downside momentum in the current fall to gauge the chance.

                Stop will be put slightly above today’s high at 1.3040.

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                US factory orders rose 0.7%, initial jobless claims rose 1k to 218k

                  Released from US, factory orders rose 0.7% in June, in line with expectation.

                  US initial jobless claims rose 1k to 218k in the week ended July 28. Four-week moving average of initial claims dropped -3.5k to 214.5k.

                  Continuing claims dropped -23k to 1.724m in the week ended July 21. Four-week moving average of continuing claims dropped -4.5k to 1.74175m.


                  Full release here.

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                  China condemns US for playing two-handed strategy in trade war

                    China finally issued a rather strong statement in response to Trump’s initiative to impose 25% tariffs on USD 200B in Chinese imports. The Ministry of Commerce criticized the US for playing a “two handed” strategy. Firstly, the US spread rumors of re-engagement. Secondly, it announced the above tariff intention. the MOFCOM condemned the US for “disregarding the interests of the whole world, as well as those of the common Americans, businessmen and consumers”. And China emphasized that such practice will have “no effect on China”.

                    MOFCOM also pledged that China is “fully prepared for counter-measures to defend the country’s dignity and the interests of the people, defend free trade and the multilateral system, and defend the common interests of all countries in the world”. And it reiterated the stance on resolving differences through dialogue, “but only under the principal of equality and keeping promises”.

                    Here is the full statement in simplified Chinese.

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                    BoE Carney’s post meeting press conference, live stream

                      Summary on interest rates

                      “With domestically-generated inflation building and the prospect of excess demand in the economy emerging, a modest tightening of monetary policy is now appropriate to return inflation to its 2 percent target, and to keep it there.”

                      “Gradual tightening of monetary policy is likely to be required in order to return inflation sustainably to its target at a conventional horizon.

                      “Structural factors that have pushed down the trend equilibrium real rate are likely to persist.

                      “Domestic short-term factors (particularly headwinds from uncertainty and fiscal drag) will fade slowly.

                      “R* expected to rise gradually. Policy needs to walk – not run- to stand still”.

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                      BoE Inflation Report shows slowing conditioning rate path

                        The new projections in the Inflation report suggests that after this rate hike, there would be a lot of room for BoE to wait and see. And, there could be only one more hike within the forecast horizon through Q3 2021.

                        In the quarterly Inflation Report, the rate path as condition by BoE for economic forecasts is slow than May’s.

                        In the current conditioning path, the Bank rate will hit 0.9% in Q4 2019 1.1% in Q4 2020 and stay there till Q3 2021.

                        In May’s conditioning path, the Bank rate will reach 1.0% already in Q3 2019, and then 1.2% in Q3 2020 and stays there till Q2 2021.

                        That is, the current path argues that the next hike could happen in Q1 2020, instead of Q3 2019. And there could be no more rate hike in the forecast horizon.

                        With such conditioning path, GDP (exclude backcast) is projected to growth faster by 1.5% in the four-quarter to Q3 2018, and 1.8% in the four-quarter to Q3, 2019. But GDP growth in the four-quarter to Q3 2020 is unchanged at 1.7%. Inflation will return to target later at 2.0% in Q3 2021, instead of Q3 2020. But, at 2.2% in Q3 2019 and 2.1% in Q3 2020, it’s reasonably close to target.

                        Full inflation report.

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                        BoE voted unanimously to raise Bank rate by 25bps to 0.75%

                          BoE voted unanimously by 9-0 to raise Bank Rate by 25bps to 0.75%. That’s the second hike since the global financial crisis in more than a decade. Asset purchase target is held at GBP 435B, also by unanimous vote.

                          The updated economic projections are “broadly similar” to May’s. GDP is projected to growth by around 1.75% on average over the forecast period. The rate is slightly slower than “diminished rate of supply growth” averaging around 1.50%. There is “very limited degree of slack in the economy”. And “small margin of excess demand” will emerge by late 2019 to feed into inflation.

                          On inflation, taken all considerations, conditioned by market pricing on interest rates, “CPI inflation remains slightly above 2% through most of the forecast period, reaching the target in the third year.”

                          BoE maintained tightening bias and said “ongoing tightening of monetary policy over the forecast period would be appropriate” But the pace of rate hike will be gradual and limited.

                          Below is the full statement.

                          Monetary Policy Committee voted unanimously to raise Bank Rate to 0.75%

                          The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 1 August 2018, the MPC voted unanimously to increase Bank Rate by 0.25 percentage points, to 0.75%.

                          The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

                          Since the May Inflation Report, the near-term outlook has evolved broadly in line with the MPC’s expectations. Recent data appear to confirm that the dip in output in the first quarter was temporary, with momentum recovering in the second quarter. The labour market has continued to tighten and unit labour cost growth has firmed.

                          The MPC’s updated projections for inflation and activity are set out in the August Inflation Report and are broadly similar to its projections in May.

                          In the MPC’s central forecast, conditioned on the gently rising path of Bank Rate implied by current market yields, GDP is expected to grow by around 1¾% per year on average over the forecast period. Global demand grows above its estimated potential rate and financial conditions remain accommodative, although both are somewhat less supportive of UK activity over the forecast period. Net trade and business investment continue to support UK activity, while consumption grows in line with the subdued pace of real incomes.

                          Although modest by historical standards, the projected pace of GDP growth over the forecast is slightly faster than the diminished rate of supply growth, which averages around 1½% per year. The MPC continues to judge that the UK economy currently has a very limited degree of slack. Unemployment is low and is projected to fall a little further. In the MPC’s central projection, therefore, a small margin of excess demand emerges by late 2019 and builds thereafter, feeding through into higher growth in domestic costs than has been seen over recent years.

                          CPI inflation was 2.4% in June, pushed above the 2% target by external cost pressures resulting from the effects of sterling’s past depreciation and higher energy prices. The contribution of external pressures is projected to ease over the forecast period while the contribution of domestic cost pressures is expected to rise. Taking these influences together, and conditioned on the gently rising path of Bank Rate implied by current market yields, CPI inflation remains slightly above 2% through most of the forecast period, reaching the target in the third year.

                          The MPC continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.

                          The Committee judges that an increase in Bank Rate of 0.25 percentage points is warranted at this meeting.

                          The Committee also judges that, were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.

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                          Yen and Dollar strong on trade war, Chinese stocks lost another -2%

                            Yen and Dollar are so far the biggest winner today on concerns of US-China trade war. Australian Dollar and New Zealand Dollar lead the way down.

                            Trump’s administration formally announced the intention to impose 25% on USD 200B in Chinese imports yesterday, more than double of the 10% rate in the original plan.

                            China is surprisingly quiet on the topic today.  Chinese Foreign Ministry spokesman Geng Shuang just made “two statement” regarding the news in a regular press conference. Firstly, “we would advise the United States to correct its attitude and not try to engage in blackmail. This won’t work on China.” Secondly, “we would advise the U.S. side to return to reason, and not blindly let emotions affect their decisions, because in the end this will harm themselves.”

                            That’s it, not even any elaboration.

                            Nonetheless, the reactions in China stocks are loud and clear. The Shanghai SSE composite closed down -2.0% at 2768.02. The breach of 2753.83 support affirmed our view that rebound from 2691.02 has completed at 2915.29, ahead of 55 day EMA and key well inside medium term falling channel. The index should revisit the key support zone between 2016 low of 2638.30 and 2700. This is an area which could prompt serious government intervention. Let’s seen if the Chinese national team would do anything there.

                            The USD/CNH (offshore Yuan). Rises to as high as 6.876 so far today and the Yuan’s downtrend extends. We’ve argued here that Yuan’s weakness is primarily due to economic weakness and loosening policies. Adding the severe impact of a full blown trade war with the US, the momentum of depreciation in Yuan doesn’t seem right. We’d urge US Treasurer Steven Mnuchin to look into whether China is doing anything to slow Yuan’s decline. If there is, Mnuchin should openly ask China not to perform such manipulations.

                            Also, remember that there was a report saying that Mnuchin is in private talks with Chinese Vice Premier Liu He on going back to the negotiation table? Hours later, there was another report regarding the 25% tariffs, which was formally announced within 24 hours. Who leaked the story to the media or it’s a made up? If the unnamed source was from the Chinese side, the US response was quick and clear, no negotiation before concession. If the unnamed source was from the US side, whose team would he be in? Or does it signal that Mnuchin was once again isolated by the trade hawks?

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                            UK PMI construction rose to 55.8, impressive turnaround of the construction sector

                              UK PMI construction rose sharply to 55.8 in July, up from 53.1 and beat expectation of 52.8. Markit noted the robust and accelerated rise in construction activity Housing building expanded as the fastest pace since December 2016. Also, rates of new order growth and job creation gain momentum.

                              Tim Moore, Associate Director at IHS Markit and author of the IHS Markit/CIPS Construction PMI®:

                              “July data reveal an impressive turnaround in the performance of the UK construction sector, with output growth the strongest for just over one year. While the recent rebound in construction work has been flattered by its recovery from a low base earlier in 2018, there are also signs that underlying demand conditions have picked up this summer. New business volumes expanded at the strongest rate since May 2017, while workforce numbers increased to the greatest extent for just over two-and-a-half years.

                              “House building was the bright spot for construction growth in July, alongside a stronger upturn in commercial development projects. Residential activity and commercial work both increased at the sharpest pace since December 2015, which contrasted with another subdued month for civil engineering.

                              “UK construction companies experienced substantial cost pressures in July, driven by rising fuel bills and higher prices for steel-intensive items. Meanwhile, supply chains struggled to keep up with greater demand for construction products and materials, which resulted in the greatest lengthening of delivery times since July 2017.”

                              Full release here.

                              Also release in European session, Eurozone PPI rose 0.4% mom, 3.6% yoy in June. Swiss PMI manufacturing rose 0.3 to 61.9 in July. Swiss retail sales rose 0.3% yoy in June. Swiss SECO consumer confidence dropped sharply to -7 in July.

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                              DIHK: US-China trade conflicts have huge impact on German companies

                                A survey by the German DHIK Chambers of Industry and Commerce warned that escalating US-China trade conflict is already hurting German companies.

                                41% of German companies doing business in China said they were affected by higher tariffs when exporting to the US. And 46% said highest cost importing from the US.

                                57% of German companies doing business in the US said there were negative effects exporting to China. 75% reported higher costs when importing from China.

                                DIHK trade chief Volker Treier said “the dangerous trade dispute between the U.S. and China is also hitting German companies doing business in the two countries.” He added, “the impact is huge: nearly half of the imports from German companies are directly or indirectly affected by the new tariffs, for example because they source raw materials or components from the other country.” He also warned that “a further escalation of the dispute would be a threat to world trade as a whole.”

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                                10 year yield regains 3% on supply pressure

                                  US 10 year yield regained 3% handle overnight on supply driven pressure. Trump’s Treasury Department announced to raise long term debt issuance to USD 78B this quarter, up USD 5B. More importantly, that’s the third consecutive quarterly increase and there is no end in sight. The act is for coping with the procyclical tax cut of the Republicans and Trump’s expanded fiscal spending. The Congressional Budget Office estimated that the fiscal deficit will rise to USD 1T by 2020.

                                  10 year yield gained 0.039 overnight to close at 3.003. That came after hitting as high as 3.016 and breached 3.009 resistance. The development affirmed the view that rebound form 2.759 is in progress for retesting 3.115 high. But at this point, we’re not seeing enough momentum for a break out yet.

                                  Similarly, 30 year yield hit as high as 3.147 before closing at 3.127, up 0.044. Breach of 3.140 resistance also affirms the bullish view that rise from 2.925 is in progress for 3.247 key resistance.

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                                  NAFTA talks progressed on auto content rules

                                    Mexican head of the trade and NAFTA office Guillermo Malpica said yesterday that the US had “started showing more flexibility last week” on NAFTA renegotiation. And, he added that “we are getting close” to an agreement on one of the sticky point, autos rule of origin.

                                    Mexican Economy Minister Ildefonso Guajardo also indicated earlier there was a shift in the focus of the debate in auto contents. He said “now what we are talking about is that a percentage of what is made in North America would be made in a high-salary zone … What does this mean? That clearly, within the component of 100 percent of an automobile made in (the NAFTA zone), a percentage, it could be about 35 to 40 percent, is made in a high-salary zone.”

                                    Canadian trade negotiator Colin Bird also said in an auto industry conference in Michigan that there was progress on auto content rules. He added that “harnessing the power of trade agreements to promote higher wages is the kind of policy all three countries can get behind.”

                                    However, another sticky point of the sunset clause is not cleared yet. Bird also warned that “any one country being able to hold the agreement hostage every five years does not provide the certainty” for businesses.

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                                    US to impose 25% tariffs on $200B in Chinese goods, joined forces with like-minded partners

                                      The US Trade Representative formally said in a statement that it’s considering to raise the proposed tariffs on USD 200B in Chinese imports from 10% to 25%. In the statement, it said “the Trump Administration continues to urge China to stop its unfair practices, open its market, and engage in true market competition.” And it emphasized that the US has been “very clear about the specific changes China should undertake” But China “regrettably” responded by ” illegally retaliated against U.S. workers, farmers, ranchers and businesses.”

                                      Also, USTR Robert Lighthizer said “the increase in the possible rate of the additional duty is intended to provide the Administration with additional options to encourage China to change its harmful policies and behavior and adopt policies that will lead to fairer markets and prosperity for all of our citizens.”

                                      More importantly, the USTR specifically said that the US has “joined forces with like-minded partners around the world to address unfair trade practices such as forced technology transfer and intellectual property theft, and we remain ready to engage with China in negotiations that could resolve these and other problems detailed in our Section 301 report.”

                                      Full statement here.

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                                      Dollar stays mixed after FOMC rate decision

                                        Dollar is trading mixed in Asian session so far as market showed little reaction to FOMC.

                                        The greenback is also trading down for the week against all but Yen and New Zealand Dollar.

                                        Fed kept federal funds rates unchanged at 1.75-2.00%. Assessment on economic activity was upgraded from “solid” to strong”. Also, “household spending and business fixed investment spending have grown strongly.”

                                        As priced in by Fed fund futures, the chance of two more hikes by December to 2.25-2.50% has firmed up again this week to around 67.6%, from 65.5% a week ago.

                                        Some suggested readings on Fed:

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                                        Fed left federal funds rate unchanged at 1.75-2.00%, full statement.

                                          No surprise from Fed. Below is the full statement.

                                          Federal Reserve issues FOMC statement

                                          Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

                                          Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.

                                          In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

                                          In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

                                          Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Esther L. George; Loretta J. Mester; and Randal K. Quarles.

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