United States: Fed leaves interest rate unchanged and signals fewer concerns
April 27, 2016
The Federal Reserved held its third monetary policy meeting of this year on 26–27 April, in which U.S. monetary authorities indicated that they were less concerned regarding financial market volatility and weak global economic activity, leaving open the possibility of a rate hike in their next meeting scheduled for mid-June. The Federal Open Market Committee (FOMC) decided to maintain the main monetary policy rate at the range of 0.25% and 0.50%, which was a decision expected by the markets. The decision in April follows similar moves in March and January, when the Fed also decided to leave interest rates unchanged. The Fed hiked rates by 25 basis points in December last year, which was the first increase in nine years.
The Fed’s statement indicated that authorities’ concerns about downside risks have eased somewhat compared to their previous assessment in March. The removal of a reference to global risks in the statement—in particular the sentence “global economic and financial developments continue to pose risks”—and the emphasis of officials of closely monitoring inflation indicators and global developments were interpreted by some analysts and market participants as modestly hawkish. This suggests that the Fed is leaving open the possibility of a rate hike in June. However, not all market participants and analysts agree with this view. Chief Economist Jan Hatzius and Senior Economist Zach Pandl at Goldman Sachs commented:
“The reaction in markets to these changes was mixed, with others interpreting the ‘closely monitoring’ language and the continued absence of a balance of risks assessment as preventing rate increases in the near-term. We disagree, and would make three points. First, changes to the statement happen for a reason, and both financial conditions and global economic data improved over the intermeeting period. Therefore, the committee’s likely intention was to signal reduced concern about downside risks. Second, the post-meeting statement has said that the FOMC would ‘closely monitor’ inflation developments since December 2014, and this did not prevent a rate increase in December of last year. This suggests to us that the phrase contains less signaling value today than it did in the past. Third, we would not necessarily read the omission of the balance of risks assessment as a clear-cut dovish signal. It could be the case that the committee feels the phrase lacks nuance, with ‘nearly balanced’ or ‘balanced’ too strongly signaling an imminent rate hike.”
In general, the statement was relatively balanced. Indeed, the global economy has recently found firmer footing and sentiment has improved, which has led to a stabilization in financial markets. A cyclical upturn is under way in the Chinese property market and further monetary easing in the Eurozone is expected to encourage lending across the common-currency bloc. Moreover, the Fed stated that the U.S. economic activity was somewhat weak at the beginning of year, but the economy continued to create jobs and inflation is showing signs of gradual increase. Finally, the Fed indicated that it will remain vigilant to upcoming economic data as well as on guard for other adverse turn of events in the global economy. Meanwhile, analysts will be alert to the minutes from the April meeting, to be released on 18 May.
Author: Ricardo Aceves, Senior Economist