The US Federal Reserve has left interest rates unchanged and signalled rates will rise more slowly than previously thought after a two day meeting in Washington which ended early this morning.
Worries about the ongoing strength of the US economy, the American labour market and international events such as the Brexit vote in Britain next month saw the Fed make a significant switch in its policy stance.
The Fed’s statement and economic projections now appear to have ruled out a July rate hike. For now investors are tipping on a move in September or even later in the year.
Although investors expected the Fed to leave rates unchanged at this meeting after the very weak May jobs report for the US and the Brexit vote, the central bank’s more cautious approach was sharply different to the rosier comments of top officials just a month ago when many talked up the need for a rate rise to curb future inflation.
The Fed’s greater caution saw yields on US Treasuries slide to a three-and-a-half-year low (10 year bond yields closed at 1.58%). Stock prices were higher for a while after the Fed’s statement was released and the press conference by chair, Janet Yellen, but turned negative in the last half hour of trading to be down around 0.2%.
The Aussie dollar rose above 74 US cents, while the share price futures contract was basically flat.
Adding to the greater sense of caution, the Fed trimmed its estimate of US economic growth in 2016 to 2% from 2.2%, but left its long-run forecast intact.
“We are quite uncertain about where rates are heading in the longer term," Ms Yellen told a news conference after the rate decision. Fed officials also expect the labor market to show more improvement, with the unemployment rate remaining below 5% for the next three years, although the jobs reports for the next few months assume greater importance after the weak May report.
Ms Yellen said the Fed would closely monitor the June employment report, due in early July, for evidence that hiring has rebounded after the weaker reports in May and April.
The new Fed stance was captured in comments Ms Yellen made to her press conference. She expressed concern in a press conference after the Fed meeting about the low level of US business investment and said; “vulnerabilities in the global economy remain.”
She also said the Brexit vote in Britain, was a factor in the Fed’s decision to leave interest rates unchanged at 0.25% to 0.50%.
And she also told the media that the US and global economic outlook suggests “our cautious approach to policy remains appropriate.” It was only a couple of weeks ago that Ms Yellen was softening up investors for a rate rise or two this year by forecasting they could occur in the coming months. That is no longer the case.
The renewed sense of caution was evident in the Fed’s so-called dot plot that reflects where top officials expect interest rates to end up. According to the new “dot plot,” six of 17 members now expect only one interest rate hike this year. That’s up from only one official in March.
The majority of the 17 still expect two rate hikes this year, but there’s little appetite to go beyond that.
The Fed also tempered its future expectations for the economy. The central bank indicated it will raise rates three times apiece in 2017 and 2018 instead of four. And in the long run, the FOMC predicts the fed funds rate will rise to 3% instead of 3.3%.
The downgrade suggests the US economy is unlikely to grow much faster over the next several years, at least in the view of Fed officials.
