Fed opens door for June rate hike

In a widely expected move, the Federal Reserve left interest rates unchanged on Wednesday, following its two-day policy meeting.

The Federal Open Market Committee acknowledged growth in the U.S. labor market as it kept its benchmark interest rate between 0.25% and 0.50%.

The Fed’s statement removed all references to global economic risks, implying that headwinds are not strong enough to rule out a rate hike in June. However, the Fed noted "labor market conditions have improved further even as growth in economic activity appears to have slowed."

After the Fed began raising rates in December for the first time in over a decade, volatility in U.S. markets and increased headwinds in Europe and China convinced many officials to delay the timing further increases.

One member of the committee, Esther L. George, voted against the decision, preferring to raise the federal funds rate to 0.50% to 0.75%. George, who is considered to have a more hawkish policy stance, also voted to raise rates at the March meeting.

The Fed pointed to some strength in the economy, including gains in the labor market. Weekly jobless claims hit a four decade low last week as unemployment remains at a steady 4.9%. However, first quarter GDP is expected to be soft, with analysts forecasting a 0.7% gain.

Inflation has run below the Fed’s 2% target for four years, and it has continued to show weakness in recent months. The personal consumption expenditures index, the Fed’s preferred measure of price inflation, rose 1% in February year-over-year as core inflation increased 1.7%. However, first quarter data varies widely due to seasonal trends, and Fed Chair Janet Yellen said at the March press conference that she is wary of drawing conclusions from recent inflation numbers.

"Given the low inflation, there’s really no pressure on the central bank to act now," said Pedro Da Costa, Editorial Fellow at the Peterson Institute for International Economics.

Fed officials previously expected to raise rates four times this year, a move that now seems increasingly unlikely given that five policy meetings remain.

"Doves have dominated Fed policy, and recent economic data trends haven't been very supportive of the Fed's plan to raise rates," said Carl Riccadonna, Chief U.S. Economist at Bloomberg Intelligence. "This makes it look more like there will only be two rate hikes this year."

However, global headwinds in June may also cause the Fed to further delay a rate increase, as Britain's vote on European Union membership is scheduled for June 23rd.

"The June meeting is curious because it happens in the middle of June," said Keith Bliss, a Senior Vice President at Cuttone & Co. "Do they have the courage to raise rates as a prelude to [the British] vote? That could throw the market in some turmoil. Then, the U.K. voting to leave the E.U. could throw the market into chaos."

Market expectations for a June rate hike are 26%, with the majority of traders predicting at least one rate hike by the end of the year.

 

Follow Justine Underhill on Twitter: @jj_under