Federal Reserve officials on Wednesday left interest rates unchanged and provided no hint of a hike at the June meeting. Mixed global economic signals and low inflation combined with Brexit uncertainties probably clouding the move. Esther L. George was the lone dissenter, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.
In the statement that followed, the Fed didn’t send any message about when the next increase could come. Fed's cautious stance underscores policymakers' lack of confidence in moving away from extraordinary easy-money policies without undermining the fragile U.S. expansion and knocking the global economy off balance. Policymakers have made room till their June 14-15 gathering to see enough encouraging developments before they act.
The statement was marginally more positive, in line with economic data. The tone of the statement was unchanged but the Committee dropped hints on its worries and what's holding it back. It noted that data since March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen.
U.K.’s referendum which is scheduled for June 23rd, a week after the Fed meets will still weigh. Earlier this month, Atlanta Fed President Dennis Lockhart said the unknown outcome of the Brexit vote “might weigh on a decision to be patient in June”. The upcoming 2016 election could also influence the Fed's thinking. Not the least, IMF recently described global growth as “fragile” and the Fed will remain conscious of the delicate global financial and economic conditions.
“The shifts in the language suggest the Fed wants to keep its options open and to make sure markets know it,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. A rate increase in June is “in play,” he added, but the U.K. vote is “a serious barrier to action.”
The tepid language greatly lowered market expectations for a June rate hike. Before the announcement, about 31% of investors called for a rate increase in June, which dropped to 19% thereafter. The Dow and S&P 500 hit their highest point of the day after the Fed's announcement, but pared most of the gains. Fed impact on the Forex market was largely muted which were rattled however by the RBNZ and BoJ.
“We maintain our forecasts implying two hikes this year and four hikes next year. Both in line with what is indicated by the FOMC dot-charts in March.” notes DNB Bank in a report.
“In March, Yellen and other Fed officials lowered their expectations to two rate hikes in 2016, where they currently stand now. But even two rate increases doesn't look like a certainty now.” said Jeremy Lawson, chief economist at Standard Life Investments.
The material has been provided by InstaForex Company – www.instaforex.com