Fed frets less over world economy; June rate hike odds rise

WASHINGTON, USA – The Federal Reserve appeared more optimistic about global economic conditions Wednesday, April 27, as it kept interest rates unchanged, raising the possibility that a rate hike could come as soon as mid-June.

The Fed cited slower growth in the US economy, despite further gains in the labor market, in holding the fed funds rate at an ultra-low 0.25-0.50% as expected.

But the language of the Federal Open Market Committee’s policy statement suggested it was less concerned about the global economic and financial landscape than during the first quarter of the year, a shift that opened the door slightly wider for an increase at its next meeting.

After a two-day review, the FOMC stuck to its stance that US monetary policy will tighten only gradually and gave no clear direction on future moves.

Instead, it suggested that domestic growth – generally thought to have slowed to about a 0.9% annual pace in the first quarter – and still-weak inflation were its primary concerns.

Since the March meeting, it said, “labor market conditions have improved further even as growth in economic activity appears to have slowed.”

“Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high.”

It noted that business investment and exports have been soft, and that inflation remains well below its 2.0% target rate due not only to the plunge in energy prices but also to cheaper imports of other goods.

Amid what has appeared to be a split on the FOMC between policy hawks and doves, only one of the 10 voting members on the panel dissented. Esther George, head of the Fed’s Kansas City branch, argued for raising the rate now to 0.50-0.75%.

Economic upturn expected

But in a shift in language in its statement, the FOMC signaled that it was less worried about international economic and market problems than in March, when it surprised markets with a distinct dovish turn.

In March the FOMC statement highlighted global issues, saying international economic and financial developments “pose risks.”

In the new outlook, it simply said that it would continue “to closely monitor inflation indicators and global economic and financial developments.”

Analysts took that as a sign the FOMC is willing to raise rates at its June 14-15 meeting, despite the possible financial market disruptions that could result from the June 23 vote in Britain on breaking from the European Union.

“The FOMC walked a fine line in keeping the door open for a rate hike at their next meeting in June, but as usual emphasized that their decision will be ‘data driven,'” said PNC Bank chief economist Stuart Hoffman.

“The more positive tone than in March is consistent with officials tightening again as soon as the June meeting, but only if the data and markets are supportive. We expect they will be supportive,” said Jim O’Sullivan of High Frequency Economics.

Not all were in the June camp.

Jason Schenker of Prestige Economics said the US growth outlook was not so rosy coming out of the sluggish first quarter.

“We continue to remain concerned about US macroeconomic data, and we do not believe the Fed will raise rates this year,” he said.

“We believe the Fed’s next move will be to cut rates in 2017.”

The unsurprising stance of the FOMC had little net effect on markets. One hour after the statement was released, the dollar was virtually unchanged from before the release, at $1.1322 per euro and 111.31 yen.

Stocks were slightly higher, with the S&P 500 up 0.2%.

But as the decision raised the chance of a June move, the yield on the 10-year US Treasury bond fell to 1.87% from 1.89%. – Paul Handley, AFP / Rappler.com