Fed leaves Rates Unchanged
RATE DECISION:Fed funds rate range maintained at 0.25% and 0.50%
IN A NUTSHELL: “Slowing job growth seems to have spooked the Fed and the members are becoming less certain about multiple rate hikes this year.”
The US Federal Reserve, led by Janet Yellen, on Wednesday kept rates unchanged on expected lines. The Federal Open Market Committee (FOMC) decided to maintain the target range for the federal funds rate at 0.25 to 0.5 per cent.
“The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation,” the FOMC statement said.
5 salient points from the Janet Yellen-led FOMC statement:
1) Fed sees one rate hike, talks of two: Although the latest dot plot released by the US Federal Reserve still hints a two gradual rate hikes in 2016, but the number of members now seeing just one rate hike has increased six-fold from one to six as the latest jobs data dented perceptions about the strength in the labour market and long-term economic growth.
The Fed itself expects the rate hikes to be gradual saying, "the Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate."
2) The tables have turned: In the previous many FOMC statements, the US Fed had stressed on the strength of the labour market while economic growth remained sluggish. In this policy statement, the tables have turned as reflected in this statement: "Information received since April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up," the FOMC said.
This is a marked departure from the earlier statements and the May job report which showed US payroll grew by just 38,000, had a major part to play in it.
3) Brexit is a risk, bigger than you think: "It is one of the uncertainties that we discussed and that factored into today's decision," said US Fed chair Janet Yellen in the post-policy press conference.
The event touted as the biggest since Lehman collapsed has got to the nerves of the world's most powerful central bank too. With the 'exit' camp gaining strength in latest polls a week ahead of the referendum, Yellen's warning will come out as a grave signal for the market.
"It is a decision that could have consequences for economic and financial conditions in global financial markets," Yellen said, adding, "If it does so, it could have consequences in turn for the U.S. economic outlook that would be a factor in deciding on the appropriate path of policy."
4) US is not as bright a spot as you thought: One thing is clear from the latest FOMC meet, that the guardians of US' economy are not as certain about its growth prospects as they used to be. In the run up to June Fed meet and before the May job data, most Fed members were bullish about job gains and the momentum in the economy suggesting it could take another rate hike.
"Although the unemployment rate has declined, job gains have diminished. Growth in household spending has strengthened," the committee said. But, the latest projections for the economy see US' long-term growth topping out at 2% far below its historical average of 3.3% that's probably the reason its sees just three hikes in 2017 and 2018 compared to four back in the March meet.
5) Yellen's not averse to helicopter money: That's right. If worst comes to worst, the US Federal Reserve chair is not completely averse to the "abnormal" idea, something that's been a taboo in the world of economics for half a century now. "It is something one might legitimately consider. I would see this as a very abnormal, extreme situation," Yellen said in the press conference post the meet. The idea shared by her previous colleague Ben Bernanke and former UK bank regulator Adair Turner has had the central banking world divided. "Whether or not, in such extreme circumstances there might be a case for, let's say, close coordination where the central bank playing a role in financing fiscal policy" is being debated, she added.
Yellen refused to rule out the option of hiking a key short-term interest rate at the Fed's next meeting on July 26 and 27.