With US economy in soft spot, Fed likely to keep policy on hold

WASHINGTON : Persistent worries about the global economy and the possibility of Brexit-Britain’s pullout from the European Union-will probably keep the Federal Reserve on hold this week as it reviews interest rates, reports BSS.
The policy-setting Federal Open Market Committee will also be buying time to be sure the US economy picks up from a modest first-quarter slowdown and more unexpected weakness in inflation, analysts say.
Minutes from the FOMC’s March meeting and speeches by Fed officials show the group is divided between those who think another increase in the benchmark federal funds rate after December’s is appropriate now, and those who want to wait.
But analysts say the heavier hand of dovish Fed Chair Janet Yellen together with Brexit, the still-simmering Greek crisis and other worries about the international economy should keep the balance against an increase.
The FOMC meets on Tuesday and Wednesday, its third meeting of a year that began with expectations of a possible four rate increases to take the Fed funds rate to 1.25-1.50 percent by year’s end.
But after the deep turbulence in international financial markets at the beginning of the year, and then some weakness in US consumer spending and business investment clouded the growth picture, expectations were lowered to just one or two quarter-point increases this year.
“Following an unexpectedly dovish turn by Chair Yellen last month, it seems to be a done deal that the Fed will leave its interest rate unchanged,” economist Harm Bandholz of Unicredit said.
Paul Ashworth of Capital Economics agreed.
“The Fed is very unlikely to raise interest rates at the upcoming FOMC meeting,” he said. “Nevertheless, we expect the Fed to leave the door open to a rate hike at the next meeting in mid-June.”
The meeting comes amid a debate inside and outside the Fed about whether the US economy is insulated enough to withstand more volatility in global financial markets and continued slow growth around the world.