USA stocks reversed early gains to end lower Wednesday, with all three major indices notching a five-day losing streak, as the Federal Reserve left interest rates unchanged after the conclusion of its two-day meeting.
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It also left unchanged a controversial 0.1 percent negative interest rate applied to some of the excess reserves that financial institutions park with the central bank.
The weak May job gains aren’t the only risk on Fed officials’ minds.
The dollar was on the defensive on Thursday after the U.S. Federal Reserve lowered its economic growth forecasts and scaled back its rate hike projections, cementing expectations that it will have to skip tightening next month.
Fed Chair Janet Yellen is scheduled to hold a news conference at 2:30 p.m. EDT.
Yellen highlighted Brexit as a big factor in the central bank’s policy decision.
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%.
Investors have become more nervous ahead of a vote in Britain next week on whether to leave the European Union, with recent opinion polls indicating growing support for such a move.
On Wednesday sterling jumped to US$1.4212 as the latest poll by ComRes showed support for remaining in the European Union at 46 per cent and the pro-exit side at 45 per cent.
Economists fear a “leave” vote could unleash turmoil on global financial markets. “Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, but business fixed investment has been soft”.
The Federal Reserve did not raise its benchmark interest rate Wednesday, acknowledging that economic growth has again been slower than it hoped and predicted.
In her remarks she gave no clues as to whether a rise could come as early as the Fed’s next rate-setting meeting in July, or if it would wait until its September meeting.
Its chairwoman, Janet Yellen, acknowledged the need to see clear signs of economic strength before lifting rates.
This could in turn affect the USA economic outlook and the Fed’s own monetary policy outlook, she said. Yet six of them now see only one rate hike, compared to only one member in March.
The Fed’s benchmark overnight lending rate remains in a range of 0.25% to 0.50%.
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Although investors expected the Fed to leave rates unchanged at this meeting after the very weak May jobs report for the U.S. and the Brexit vote, the central bank’s more cautious approach was sharply different to the rosier comments of top officials just a month ago when many talked up the need for a rate rise to curb future inflation. The remainder, however, predicted a rate hike, perhaps to head off a rise in inflation set off by a plunge in sterling. If the market and the economy experience turmoil like they did in January, banks will hold off on deposit rate hikes just like they did this year.
