The U.S. Federal Reserve kept interest rates unchanged on Wednesday and signalled it still planned to raise rates twice in 2016, though it said slower economic growth would crimp the pace of monetary policy tightening in future years. Even though a surprise is still possible, this meeting is likely to be a non-event as the Fed should keep rates unchanged at 0.25% – 0.50%.
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Gold prices spiked following the latest Federal Open Market Committee (FOMC) meeting. In its statement, the US central bank lowered its economic growth forecasts for 2016 and 2017 and indicated it would be less aggressive in tightening monetary policy after the end of this year. Fifteen of the 17 officials now expect no more than two rate increases this year, up from 10 officials in March. The pace of fed funds rate increases over the next few years now looks to be lower. The median probability for an increase in six weeks time dropped to 20 percent from 34 percent in the June 3 survey.
“We do need to make sure that there’s sufficient momentum”, Yellen told a news conference.
Yellen is signaling her belief that the US economy is improving but remains defined by so many uncertainties that it’s unclear when the Fed should resume raising interest rates. Investors are betting that there’s only a 2% chance of a rate hike in June.
The June 23 Brexit vote “could have consequences for economic and financial conditions in global financial markets”, said Fed chairman Janet Yellen.
The FOMC statement recognized that the labor market improvement has slowed, but that growth has accelerated.
Sure, the pace of hiring in the US slowed sharply in May and April, but job openings remain at a record high, layoffs are near a four-decade low, wages are rising and small businesses are more optimistic than they’ve been in years. And they will raise rates three more times in 2018, compared with a previous forecast of four. That is a far cry from the 3.5 to 4 percent that the Fed’s policy rate has averaged since the 1990s, and means the central bank will treat each move with particular caution, current and former Fed officials say.
High-grade government bond yields have plunged in recent weeks amid stepped-up bond buying by the European Central Bank, rising concerns that the United Kingdom could vote to leave the European Union in a June 23 referendum and growing confidence that the Fed will hold off in raising interest rates this summer after a recent disappointing jobs report.
National Association of Federal Credit Unions (NAFCU) Chief Economist Curt Long said, “The decision to leave rates the same was widely expected, especially after the disappointing job numbers in May”.
During the housing boom a decade ago, the Fed started pushing interest rates higher to tamp down excessive borrowing to buy real estate.
If that’s the case, the Fed’s downshift in the size and timing of future interest-rate increases can only reflect broader worries about growth at home and overseas.
So the Fed made a decision to wait until the USA economy pulls into sharper focus.
Consumer spending has driven domestic economic growth even as other nations have spent less on USA goods.
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But it has now downgraded that projection to two increases amid concerns over the health of the global economy and volatility on financial markets. The Committee also noted that inflation is still running below the 2 percent goal. They expect inflation to reach the Fed’s desired 2 percent annual rate in 2018. The yield on the 10-year U.S. Treasury note fell to 1.58 percent from 1.61 percent a day earlier.
