Fed Leaves Door Open for June Rate Increase

Federal Reserve policy makers left open the door to raising interest rates in June by nodding to improvement in global financial markets and downplaying recent weakness in the US economy.

The Federal Open Market Committee omitted previous language that “global economic and financial developments continue to pose risks,” instead saying officials will “closely monitor” the world situation, according to a statement released Wednesday following a two-day meeting in Washington. The Fed left its benchmark interest rate unchanged.

Key Points:

  • The 27 April statement downgraded economic activity, said it “slowed”, but labour market conditions “improved further” and inflation still expected to rise toward 2% over the medium term
  • Removed language that “global economic and financial developments continue to pose risks”
  • Kansas City Fed’s Esther George dissented in favour of a rate hike

 

The FOMC meeting statement of 27 April was downgraded its assessment of current economic activity as it “appears to have slowed”, but overall the tone was for moderate expansion, further improvements in the labor market, and low inflation that is still expected to gradually return toward the 2% objective as “transitory effects of declines in energy and import prices dissipate”.

Inflation expectations “remain low”, while survey-based measures of inflation compensation were “little changed, on balance”.

The key change in the statement is the removal of the language that said, “However, global economic and financial development continue to pose risks.” While the FOMC will continue to “closely monitor inflation indicators and global economic and financial developments”, the deletion suggested that FOMC participants are in consensus that impacts from global market turbulence will have a limited impact on the US, and that the US economy will remain resilient in the face of headwinds.

This leaves the door open for a rate hike at the 14-15 June meeting provided the economic data remains about the same as at present, or improves. 

Esther George, president of the Kansas City Fed, dissented for the second meeting in a row, repeating her preference for a quarter-point increase instead of voting to leave the federal funds rate’s target range at 0.25-0.5%.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s