Esther George, head of the Federal Reserve Bank of Kansas City, Mo., who had dissented in earlier meetings because she favored faster rate increases, backed Wednesday’s decision to keep rates unchanged. Last fall the US central bank deferred an expected rate rise after global markets swooned in response to an unanticipated slowdown in China’s economy.
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The Fed raised interest rates for the first time in almost a decade last December, leading to expectations that a series of rate increases would follow. “If it does so, it could have consequences in turn for the U.S. economic outlook”.
She said that at the start of the year, there was some momentum witnessed in the U.S. economy and labor market. Economists had expected prices to rise by 0.3 percent. On a year-over-year basis, that put the real average hour wages increase at just 1.4 percent, a number that likely will give little comfort to Fed officials looking for wage gains as a sign that the central bank can start normalizing interest rates.
In addition to the May jobs report, other economic barometers have also sowed doubts from tepid consumer spending and business investment to a slowdown in worker productivity to stresses from China ad other major economies. Ultimately, by holding off on a June rate increase and marking down rate forecasts for the months ahead, the Fed nudged its views toward market views.
“The Fed seemed to have taken a cautious approach given its weak job data and risks concerning the possibility of Britain exiting the European Union”, said Choi Sang-mok in a meeting to review the country’s macroeconomic conditions on Thursday.
Economists polled by Reuters had seen virtually no chance that the Fed would raise rates on Wednesday.
Crude inventories fell by 933,000 barrels last week, the U.S. Energy Information Administration reported, less than half the 2.3-million-barrel decrease expected by analysts.
A sharp slowdown in US hiring in May had fueled doubts about the strength of the labor market going into the Fed’s two-day policy meeting. Both the post-meeting statement from the committee and Chair Janet Yellen’s remarks in a post conference cited labor weakness weighed heavily on the moves. The move dubbed Brexit could tip Europe back into a recession, putting more pressure on the global economy and boosting the safe-haven appeal of bullion. The Fed statement on Wednesday made no reference to that vote. In addition, as we have argued, Fed caution and comfort being behind the curve on inflation presents a headwind for United States dollars from a real yield standpoint, as markets reward inflation-generating central banks. The US added just 38,000 new jobs, according to the Department of Labor. A year ago it was 1.68 percent at the end of 2016.
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The ratcheting down of the number of U.S. rate hikes is one but there is also global economic uncertainty, the USA election cycle and other geopolitical risks not related to the UK.
