Monday 5 December 2016

US Federal Reserve expected to hold rates steady as Brexit vote clouds outlook

Published 15/06/2016 | 09:40

Janet Yellen
Janet Yellen

The Federal Reserve is expected to keep interest rates unchanged on Wednesday and signal if it still plans to raise rates twice in 2016 amid concerns about a U.S. hiring slowdown and Britain's possible exit from the European Union.

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The Fed raised its key overnight lending rate in December for the first time in nearly a decade, but it has backed away from further monetary policy tightening this year largely due to a global economic slowdown and financial market volatility.

The U.S. central bank is scheduled to issue its latest policy statement and updated economic projections following a two-day meeting at 2 p.m. EDT (1800 GMT). Fed Chair Janet Yellen will hold a news conference half an hour later.

The Fed's targeted overnight lending rate is forecast to remain in the current range of 0.25 percent to 0.50 percent, according to a Reuters poll of 151 economists.

Fed forecasts in March pointed to two rate rises in 2016, but a sharp slowdown in U.S. job gains in May and the prospect that Britain could vote next week to leave the EU have added to doubts about the economic outlook.

With U.S. hiring expected to bounce back in June and no financial meltdown from the Brexit vote currently seen, economists in the Reuters poll now expect the Fed to tighten monetary policy in July or September.

Yellen, however, recently warned that a British exit from the EU could have a significant economic impact, a concern shared by other Fed policymakers.

"We shouldn't expect the Fed to be prepared to send a clear signal about a timing of rate hikes," said Roberto Perli, an economist at Cornerstone Macro.

The Fed telegraphed December's rate increase by saying in October it would consider tightening at its next meeting. While such clarity appears unlikely on Wednesday, policymakers could provide guidance through their updated economic forecasts.

Perli and other analysts expect those forecasts will continue to point to two rate increases this year. They calculate eight of the Fed's 17 policymakers would need to shift their outlook for the closely-watched median forecast to move to only one increase.

Prices for interest rate futures suggest investors are betting on just one rate rise this year, according to CME Group.

Economists expect the Fed will raise rates at least once this year, based on a view of an improving U.S. jobs market and the central bank coming under pressure to keep inflation from rising well above its 2 percent target.

"With the unemployment rate at 4.7 percent, wage growth clearly picking up, and financial conditions much easier, there is likely a limit to how long the Fed's pause can last," Goldman Sachs economists Jan Hatzius and Zach Pandl wrote in a recent note to clients.

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