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

USA stocks dropped a fifth straight day Wednesday as the Federal Reserve kept interest rates unchanged amid concern about Britain’s upcoming vote on whether to exit the European Union.

The move was a signal the USA economy had recovered enough from the trauma of the Great Recession to be able to handle closer-to-normal interest rates.

The Fed holds eight monetary policy-setting meetings a year and has four remaining in 2016.

It raised the fed funds rate in December for the first time in almost a decade but has stood pat since amid a listless USA and global economy and financial market turbulence early in the year.

Yellen had hinted at higher chances of a rate hike than the markets had priced in, but weak May jobs data and economic repercussions of a possible Brexit forced her to take a dovish stance last week. Since the Fed began publishing policymakers’ economic projections in 2012, estimates of the long-run rate have been cut from 4.25 per cent.

Importantly, the number of officials who predict one rate hike this year climbed to six, up from one in March.

Despite the economy’s recent acceleration, the Fed expects slightly more subdued growth longer-term.

The Fed also said the economy would grow only 2 percent this year and in 2017, 0.1 percentage point lower than previously forecast for each year.

Some investors likely sold after the Fed announcement failed to spur a major rally, said Mace Blicksilver, director of Marblehead Asset Management. Stocks initially traded about where they were before the statement was released at 2 p.m. Eastern time before drifting modestly lower in late-afternoon trading. The yield on the benchmark 10-year Treasury note did edge down to 1.58 percent from 1.60 percent.

With the Fed still trying to encourage spending, investment and hiring, a low neutral rate means the Fed has less room to move before that stimulus is gone. George dissented at the prior two meetings. That view was encouraged by the minutes of its previous meeting in April.

In a press conference after the FOMC meeting, Fed Chair Janet Yellen said the June 23 referendum in the United Kingdom on whether to remain in the European Union influenced the USA central bank’s decision to keep interest rates unchanged.

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”.

“We do need to make sure that there’s sufficient momentum”, Yellen told a news conference. A yes vote could roil markets, and the Fed wouldn’t likely want to further unnerve investors with a rate hike just a week before that vote.

“It is a decision that could have consequences for economic and financial conditions in global financial markets”, Yellen said, Bloomberg reported.

She said a July hike “is not impossible”, suggesting that strong job growth in June and substantial upward revisions of May’s feeble gains could embolden the Fed to act soon.

More important, the Fed issued a less-aggressive outlook for future rate hikes, citing persistent uncertainties pertaining to the economy and worldwide events.