Brexit vote casts shadow over Fed rate move | News | DW | 15.06.2016
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Brexit vote casts shadow over Fed rate move

The referendum in Britain is set to influence a meeting of the US central bank and the possibility of the US Fed increasing interest rates further amid robust growth and job creation in the world's strongest economy.

Following a two-day meeting of the US Fed's Federal Open Market Committee (FOMC), the US central bank is set to announce further guidance on its interest rate policy at a news conference at 1800 GMT on Wednesday.

The expectation is that the Fed will keep interest rates unchanged under efforts to soothe financial markets ahead of the Jun 23 referendum in Britain about whether or not the country should leave the European Union.

"It makes very little sense for any central bank to do anything before the June 23 vote. They need to save their ammo in case markets slip heading into the second half of the year," DailyFX analyst Christopher Vecchio told the news agency AFP.

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

The US central bank 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.

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First US rate hike in nearly a decade

According to a poll of 151 economists made by the news agency Reuters, a wide majority of them believes the Fed's targeted overnight lending rate will remain in the current range of 0.25 percent to 0.50 percent.

One or two hikes?

Originally, the Fed was eying two rate hikes in 2016, with the first expected to come in June. But a sharp slowdown in jobs in May and the prospect of Britain leaving the EU have added to doubts about the economic outlook.

Therefore, economists expect a new rate increase not to happen before July or September. Yet, amid expectations that the US jobs market will likely rebound in the summer and that the central bank is coming under pressure to keep inflation from rising well above its 2 percent target, US investment bank Goldman Sachs thinks the Fed may not be able to keep rates stable beyond that.

"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," the bank's economists Jan Hatzius and Zach Pandl wrote in a recent note to clients.

New figures released by market researchers CME Group and gauging prices for interest rate futures suggest that investors are also betting on just one rate this year instead of two.

uhe/jd (AFP, Reuters, dpa)

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