Canadian Underwriter

Fed keeps key rate unchanged; no hint on timing of next hike

April 27, 2016   by Martin Crutsinger - THE ASSOCIATED PRESS

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WASHINGTON – The Federal Reserve kept a key interest rate unchanged Wednesday against the backdrop of a slowdown in U.S. and global growth and provided no hint of when its next rate hike may occur.

iStock_000073573727_SmallIn a statement after its latest policy meeting, the Fed noted that the United States is enjoying solid job gains but also that “economic activity appears to have slowed.”

The Fed said that such key areas as consumer spending, business investment and exports have weakened in recent months. At the same time, it expressed less alarm about global economic conditions than it had after its previous meeting in March.

In March, the Fed had cautioned that global developments “pose risks.” In Wednesday’s statement, the Fed no longer mentioned such risks, though it said it would “closely monitor” global economic and financial developments.

The Fed repeated that it expects inflation to move toward its 2 per cent target from persistently low levels as temporary factors, like much lower energy prices, fade.

“The softness in U.S. economic data to start 2016 gave the Fed plenty of cover to hold off on further rate hikes now, and they held their cards close to the vest regarding upcoming meetings,” said Greg McBride, chief financial analyst at Bankrate.

Investor reaction to the Fed’s announcement, which was in line with expectations, was muted. Bond prices rose slightly, sending yields moderately lower. Stock indexes traded about where they were before the Fed released its latest policy statement at 2 p.m. Eastern time.

The Fed’s decision was approved on a 9-1 vote, with Esther George, head of the Fed’s regional bank in Kansas City, dissenting for a second straight meeting. As in March, George argued for an immediate rate hike.

The Fed didn’t rule out a rate hike at its next meeting in June. But neither did it say anything in its statement to prepare investors for such action.

In October, the Fed had said in a post-meeting statement that it would decide whether it would be “appropriate” to raise rates at its next meeting in December, when it did increase rates from record lows.

Related: U.S. interest rates unchanged, Federal Reserve foresees fewer hikes in 2016

Economists have suggested that the Fed will likely again insert such language into the statement that precedes its next rate hikes to prepare investors and ensure an orderly market response.

On Wednesday, the Fed took note of a slowdown in economic growth at the start of the year. Its statement said that consumer spending has moderated in recent months even though incomes have been growing solidly.

The statement also observed that business investment spending and exports have slowed. Business investment has been hurt by the plunge in oil prices. Lower energy prices have triggered spending cuts at energy companies. And exporters have struggled with a strong dollar, which has made American goods costlier overseas.

In December, when the Fed raised its benchmark rate, it signalled that it expected four more rate hikes in 2016. But in March, it revised that expectation to just two hikes. And some economists say it might not raise rates again before the second half of the year.

A slowdown in China, the world’s second-largest economy after the United States – has already hurt the developing world. Europe is straining to gain momentum, and Japan is hobbled by wary consumers and an aging population.

On Thursday, the government is expected to estimate that the U.S. economy grew at a tepid annual rate under 1 per cent in the January-March quarter. Some forecasters think growth might have been as weak as 0.3 per cent, which would mean the economy nearly stalled out last quarter.

What’s more, U.S. inflation is running well below the Fed’s optimal level of 2 per cent.

In the meantime, far from considering rate hikes, other major central banks are weighing steps to further ease credit, increase inflation and bolster growth.

On Thursday, for example, when the Bank of Japan meets, a key topic will be what else it might do to fight economic weakness, raise inflation and blunt a rise in the yen’s value against the dollar, which hurts Japan’s exporters. In January, in a desperate bid to raise inflation, Japan’s central bank introduced negative rates. Yet inflation and growth remain stuck near zero.

Last week, Mario Draghi, head of the European Central Bank, made clear he was ready to launch more stimulus efforts if needed to energize the 19-nation eurozone economy. That pledge came after the ECB had already expanded its stimulus programs in March.

China’s sliding economy has stabilized after worries about its growth had rocked financial markets in January. But now, a new challenge has raised international concerns: A June 23 referendum in which Britain will decide whether to leave the European Union. President Barack Obama and other world leaders have warned that a British exit from the EU could threaten the global economy.

Because that vote will occur just a week after the Fed’s June 14-15 meeting, some analysts have suggested that the U.S. central bank would avoid any rate hike in June for fear it could rattle markets ahead of the British vote.

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