Fed keeps interest rate steady as Brexit vote looms

WASHINGTON, USA – The Federal Reserve held its key interest rate unchanged Wednesday, June 15, in part due to concerns about the disruption Britain’s looming Brexit vote could have on global markets.

While voicing confidence in continued US economic growth, Fed Chair Janet Yellen said the June 23 referendum on Britain quitting the European Union was an important factor in the Fed keeping monetary policy on hold.

“Clearly, this is very important decision for the United Kingdom and for Europe,” she said in a news conference at the end of a two-day meeting of the Federal Open Market Committee.

“It is a decision that could have consequences for economic and financial conditions in global financial markets. If it does so, it could have consequences in turn for the US economic outlook.”

The FOMC had been expected to leave its benchmark federal funds rate, a short-term peg for dollar lending rates around the world, at a low 0.25-0.50%.

The US central bank had been surprised by a sharp downturn in hiring by US companies in May, slow business investment, and stubbornly low inflation.

But the gains by the anti-EU camp in Britain in recent weeks ahead of the referendum have increased worries about the unpredictable impact on markets.

Yellen warned earlier this month that a pro-Brexit result “could have significant economic repercussions.”

Amid the uncertainties on the international scene and the May employment stall, the FOMC lowered its forecast for US growth to 2.0% for this year and sees that same tepid pace holding through 2018.

But the policy panel remained confident enough in hiring resuming a solid pace, and in inflation picking up, that it indicated it still expected that the Fed funds rate would be increased twice over the next six months to near 1.0%.

“Fortunately, the first-quarter slowdown in household spending appears to have been temporary,” Yellen said.

“Indicators for the second quarter have so far pointed to a sizable rebound.”

Little market reaction

The FOMC stuck to its forecast that inflation will rise to its target of 2.0% “over the medium term” but that it continued to watch prices.

Before the meeting some analysts had expected that the Fed might turn much more dovish on its inflation and rate expectations after the downturn in the employment market in May, when the number of jobs added to the economy fell to the lowest level in nearly 6 years.

But the FOMC policy statement was more neutral, analysts said, and they were divided about what it means for the outlook.

Ian Shepherdson of Pantheon Macroeconomics said he expects the Fed to wait through July to confirm the economy’s strength, and that data will support a rate increase in September.

“We remain of the view that the Fed is now in real danger of falling behind the tightening of the labor market,” he said in a client note.

But economist Chris Low of FTN Financial was more skeptical.

“The FOMC continues to believe its plans to raise rates have been thwarted by a series of one-off ‘headwinds,'” he said.

“The forecast suggests these headwinds will stop blowing in the next couple of months. Reality is likely to differ.”

Markets had a modest reaction. The dollar fell 0.2% to $1.1265 against the euro, and US treasury bond yields edged lower, the 10-year bond falling to 1.60% from 1.61%. – Paul Handley, AFP / Rappler.com