The Federal Open Market Committee (FOMC) statement brought no surprises on Wednesday.
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Fed forecasts in March pointed to two rate rises in 2016, but a sharp slowdown in USA job gains in May and the prospect that Britain could vote next week to leave the European Union have added to doubts about the economic outlook.
The US Federal Reserve announced it would notraise interest rates on Wednesday afternoon, blaming uncertainty over the UK’s potential exit from the European Union and slowing economic growth for the decision. Stocks initially traded about where they were before the statement was released at 2 p.m.
Suddenly, expectations for a rate hike this month declined. The patience exhibited by the Federal Reserve put downward pressure on the United States dollars, although Chair Yellen made sure to keep the July and September meetings as live ones, even though they both have their shortcomings.
The central bank statement mentioned that the improvement in the labour market has slowed, but has been offset partially by a growing economic activity.
In the U.S. bond market, benchmark 10-year U.S. Treasury notes fell 1/32 in price to yield 1.616 percent.
For weeks, the Fed had been expected to raise interest rates this summer, possibly as soon as June. Other aspects of the report were clearly dovish – the number of members who expected just one rate increase this year increased to 6 from 1, the lone dissenter from April retracted her vote to raise rates, and future expectations were lowered. That rate is now between 0.25 percent to 0.5 percent – and Fed officials expect it to be at 2.4 percent in 2018.
Against this backdrop, the Committee chose to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. That view was encouraged by the minutes of its most recent meeting in April.
While the economy is picking up at a decent clip in the second quarter after a new year lull, Dr Yellen said job growth had “slowed markedly”. Growth in household spending has strengthened. And some Fed watchers expressed confusion about the central bank’s approach to rates. In March, it revised the forecast down to just two interest rate hikes for 2016. Fed officials contend that they have long stressed that their rate policies are not on a pre-set course but rather are “data dependent”.
“No doubt Ms. Yellen and company will make references to the current turbulence caused by the Brexit vote as part of the reason for their cautious approach”, said Boris Schlossberg, managing director of FX strategy at BK Asset Management in NY. He believes Yellen and her board of officials waited too long to hike rates.
There’s a “sense that maybe that more of what is causing this rate to be low are factors that won’t be rapidly disappearing but are part of the ‘new normal, ‘” Yellen said at her post-Fed meeting news conference. Other analysts think the economic outlook will still be too cloudy for a July rate hike and are pointing to September as the most likely time for a Fed move. Even if the Fed chooses to raise rates this year, we expect the pace of rate increases in coming years to be very restrained.
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Fed officials keep stressing that only when the latest data shows the economy edging consistently toward full health will they resume raising rates.
