Fed Leaves Rates Unchanged Due To Diminishing Economic Outlook Risk

Global stocks sold off after the United Kingdom referendum and while they have more than recovered their losses, economists said further turbulence may lie ahead.

“Near-term risks to the economic outlook have diminished”, the FOMC said in announcing the outcome of the closely watched two-day meeting in Washington which ended on Wednesday. Fed will have two more meetings this year after September-one before the Nov 8 presidential elections and the last one in December.

Despite several strong market signals, the FOMC said it believes the domestic economy is still too vulnerable to move rates beyond the 1/4 to 1/2 percent it established seven months ago.

The dollar sagged against its peers as some in the currency market had hoped the Fed would give a clearer indication that it could raise rates within the year. Relatively high US rates strengthen the dollar, hobbling USA exports and the economy.

The minutes of this week’s Federal Reserve policy meeting, to be released in three weeks, will suggest a majority support for a rate hike in September, said Lou Crandall, chief economist at Wrightson ICAP.

As for just when the Fed will raise rates, the central bank was vague in regard to an exact timeline. Esther George, the president of the Fed’s Kansas City regional bank, dissented for the third time this year, arguing for an immediate quarter-point rate hike.

The last time the central bank raised its benchmark rate – the rate banks and credit unions charge other depository institutions on overnight loans – was December 2015.

“With financial contagion to the U.S. from Brexit limited, the timing of the next Fed move will be more dependent in the coming quarter than it has been all year”, Mr Metcalfe said.

But seven months into the year, the Fed’s plans have been delayed by weak growth in the first quarter, labor-market volatility in the spring, and uncertainty surrounding the Brexit vote. A string of better-than-expected economic data recently as well as an easing in financial conditions also have calmed nerves. Attention will now be in the second quarter US gross domestic product estimate expected on Friday, which could show improvements from the previous quarter.

Now markets are waiting for more clarity on United States rate hike move when Fed Chair Janet Yellen speaks at Jackson Hole, Wyoming, on August 26. That marked a mild upgrade from June, when the Fed said household spending had strengthened and economic activity appeared to have picked up.