Leaving rates alone, Fed sees ultra-slow pace of hikes ahead


19 June, 2016

She - and, she said, the Fed's policy making committee - did not feel that "progress in the labour market has come to an end".

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. The possible "Brexit" is a "decision that could have consequences for economic and financial conditions in global financial markets", Yellen said. Also of concern were expectations that inflation would remain low in the near-term, falling short of the central bank's 2% inflation target.

On Wednesday, the fed funds rate averaged 0.37 percent, trading in a range of 0.36 percent to 0.56 percent with $69 billion changing hands. Longer-dated projections saw a more pronounced move lower, with the median now forecasting three hikes in each of 2017 and 2018, in contrast to the four that were previously expected.

South Korea's central bank, which surprised markets by lowering rates last Thursday, has earned some time as concerns about foreign fund outflows have diminished for now.

Fed officials contend that they have long stressed that their rate policies are not on a pre-set course but rather are "data dependent".

The Federal Open Market Committee kept interest rates on hold, and signalled an even more gradual path for any future rate increases, bolstering bets on both equities and US Treasuries.

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The key consideration in this decision was the U.S. jobs market - with a little help from the uncertainties arising from the forthcoming British referendum and a few other factors. It noted that the housing market is improving and that the consequences of an export slowdown have lessened.

Strategists said that while the Fed decision to leave rates unchanged was widely expected by investors, its statement was surprisingly cautious.

After Fed Chair Janet Yellen's dovish post-meeting news conference, the dollar ended the day down 0.5 per cent against the euro, at US$1.1263. The Fed is trying to raise rates even as central banks overseas maintain or boost stimulus to bolster economic growth.

The projections of Fed policy members showed a majority of them still see two rate hikes this year. This is the fourth straight meeting in which the FOMC has decided against a rate hike. Though Fed has not removed the possibility of a hike in July but Business Finance News believes September to be more likely for a rate hike.

The Fed officials also lowered their forecast for GDP growth in 2016 to 2 percent from its March forecast of 2.2 percent. In deferring a hike, poor job creation, lower inflation and mounting external risks including Brexit have dominated the Fed thinking, reports Bloomberg.

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