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Fed Signals No Rush To Hike Rates As Economy Hits Soft Patch

The Federal Reserve left interest rates unchanged on Wednesday, but kept the door open to a hike in June while showing little sign it was in a hurry to tighten monetary policy amid an apparent slowdown in the US economy

Photo Credit : Reuters


The Federal Reserve left interest rates unchanged on Wednesday (27 April), but kept the door open to a hike in June while showing little sign it was in a hurry to tighten monetary policy amid an apparent slowdown in the US economy.

In a statement that largely mirrored the one issued after its last policy meeting in March, the US central bank's rate-setting committee described an improving labour market but acknowledged that economic growth seemed to have slowed.

It also said it was closely watching inflation and noted that global economic headwinds remained on its radar, though it made no mention of the risks they posed, as it had last month.

"The committee continues to closely monitor inflation indicators and global economic and financial developments," the Fed said following a two-day meeting.

Prices for US equities edged up after the announcement, while the dollar was little changed against a basket of currencies. Prices for longer-dated US Treasuries rallied.

Traders kept their bets that the first rate hike of 2016 would come in September and gave less-than-even odds of a follow-up hike by December. Fed policymakers in March forecast two hikes this year.

Investors currently see a 23 per cent probability that the Fed's overnight lending rate will rise in June, up from 21 per cent prior to the decision, according to CME's FedWatch group.

"This latest statement has not laid out a strong position for a June rate hike," said Bill Irving, a portfolio manager with Fidelity Investments.

The Fed kept the target range for its overnight lending rate in a range of 0.25 per cent to 0.50 per cent, in line with expectations in a Reuters poll. The central bank raised rates in December for the first time in nearly a decade.

The Fed, which has tried to move away from issuing forward guidance since embarking on a rate hike path it has described as gradual, made no mention of how it viewed the balance of risks to the economic outlook. It was the third straight policy statement in which policymakers had kept mum on that detail.

The Fed acknowledged that growth in household spending had moderated, but said households' real income had risen at a "solid rate" and consumer sentiment remained high.

Noting a recent pick-up in inflation, the Fed expressed confidence that it would rise to its 2 per cent target over the medium term, while reiterating inflation was expected to remain low in the near term.

Despite strong job gains and a national unemployment rate of 4.9 per cent, Fed policymakers have previously said they would proceed cautiously in raising rates again due to the uncertainty in the world economy and a lack of inflation pressures at home.

"I think they are in wait-and-see mode," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Asset Management.

The Fed was spooked earlier in this year by a global equities sell-off and the tightening of financial markets largely on concerns of an economic slowdown in China.

Stocks have continued to rally since Fed policymakers met in the middle of March and investors' nerves have been soothed by an apparent pick-up in China.

Other major central banks have been grappling with ways to deal with lacklustre economies, including the adoption of negative interest rates.

With US interest rates still close to zero, the Fed is concerned it would have to rely on more unconventional policy tools should the economy take a turn for the worse.

An initial estimate of first-quarter gross domestic product is expected on Thursday to show tepid growth, with economists polled by Reuters forecasting annualised growth of 0.7 per cent. The economy grew at an annual rate of 1.4 per cent rate in the fourth quarter.

Kansas City Fed President Esther George dissented for the second consecutive meeting on Wednesday, citing the need to raise rates by a quarter of a percentage point.


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