But some Fed watchers are wondering why the Fed is shifting so much of its longer-term view on rates.
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Besides CPI, weekly jobless claims are also reported at 8:30 a.m. EDT and are expected to rise slightly to 270,000. Job gains in April and May are estimated to have averaged only about 80,000 per month.
The Federal Reserve’s statement was little changed from April.
The Fed cut its forecast for US economic growth in 2016 to 2%, down from 2.2% earlier. I think the fact that the Fed remained on hold for a 25 bps increase shows how fragile the economy is at these levels. The recent volatility in financial markets due to a greater chance of “Brexit”-the United Kingdom leaving the European Union -factored into the Fed’s decision, but the statement didn’t play up global developments”. “Look at December: Their forecast was for four rate hikes, the markets said ‘no, just two.’ Now the market is [lowering its expectation and] the Fed is moving down as well”.
The statement was silent on geopolitical risks or the effects of low interest rates globally.
The central bank bumped up its estimate for inflation for this year to 1.4% after it had been slashed in March to 1.2%.
Ian Shepherdson of Pantheon Macroeconomics said he expects the Fed to wait through July to confirm the economy’s strength, and that data will support a rate increase in September.
After prepping the market for a June or July hike before a weak May employment report, the Fed is getting more dovish again and can’t seem to bring itself to raise rates. A slew of solid economic data in May encouraged Fed officials to drop hints about a possible June rate hike.
Then the May jobs report, which came out June 3, seemingly wiped out the chance of a rate move.
So the Fed made a decision to wait until the US economy pulls into sharper focus. However, the millions of people who have given up looking for work and part-time employees wanting more hours, hide the slack remaining in the labour market, Dr Yellen argued. The Fed had hoped that the US economy, along with Europe and Asia, would be in better shape in 2016.
Britain’s exit from the 28-member European Union would add more uncertainty for Yellen’s Fed as it seeks to re-establish its rate-setting credibility in the face of skeptical markets which have now all but priced out a rate rise by the USA central bank this year.
“I don’t think this was a good day at all for Fed credibility and it wasn’t a food day at all for them generating confidence for monetary policy”, Ward McCarthy, chief financial economist at Jefferies, told CNBC.
Chris Gaffney, president of World Markets at EverBank, said Yellen’s comments point “toward rates remaining unchanged through the end of 2016”.
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“This is an FOMC announcement that really speaks to a global weakness and the bottom line is it underscores the fact the U.S.is not an island and the global markets and economy are more interconnected than they have ever been”, said Peter Kenny, Senior Market Strategist at Global Markets Advisory Group in Berkeley Heights, New Jersey. Incoming data has been noticeably stronger, the drags from low oil prices and a strong dollar were less than previously estimated, and there is still a possibility that the government’s seasonal adjustment continues to underestimate GDP in the first quarter while boosting it in subsequent quarters.
