Federal Reserve Leaves Interest Rates Unchanged

By June 20, 2016News, Uncategorized

On Wednesday the Federal Reserve failed to raise interest rates, a result many expected given the mixed messages that were sent over the past several weeks regarding the strength of the U.S. economy.  After raising the benchmark federal funds rate in December after nearly 7 years at near zero, the Fed, by unanimous decision, left the target range unchanged at 0.25 percent to 0.5 percent.

Despite gains in economic activity, fewer Fed officials now expect the central bank to raise interest rates more than once this year due to slowed improvement in the labor market.  While the median forecast remains at two quarter-point rate hikes in 2016, the number of officials who see just one increase rose dramatically since March according to projections released by the Federal Open Market Committee on Wednesday.

The Fed reiterated that interest rates are likely to rise at a “gradual” pace, without referring to any specific timing for another increase.  In April most Fed policy makers said they favored a June hike if the economy continued to improve.  Those intentions were spoiled, however, by the Labor Department’s May employment report which reflected the worst gain in payrolls since 2010.

A tightening labor market, signs of rising wages and a pickup in consumer spending have combined to nudge the Fed toward another hike, while a slowing pace of job creation, evidence of lower inflation expectations and persistent risks from outside the U.S. have provided reason for caution.

One notable risk factor for global financial markets will come to a head in one week when voters in Britain decide whether to remain in the European Union.  Recent opinion polls showing gains for the “Leave” campaign have weakened the pound and driven yields on German 10-year bonds below zero for the first time.

The Fed did express confidence that the U.S. job market will rebound, saying that it expects labor market indicators will strengthen; and that the drag from net exports appears to have lessened and housing has improved.  Moving forward, the Fed indicated that it will continue to closely monitor inflation indicators and global economic and financial developments as it weighs the timing and likelihood of a future rate hike.

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