Fed Meets on In­ter­est Rates but Mar­kets Eye June De­ci­sion

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Wash­ing­ton: Mar­kets were al­ready fo­cus­ing more on what might hap­pen in June as the Fed­eral Re­serve opened its two-day mon­e­tary pol­icy meet­ing Tues­day with no ex­pec­ta­tions of an in­ter­est rate change.

With Chair Janet Yellen hav­ing tilted the Fed­eral Open Mar­ket Com­mit­tee to the dovish side in its March re­view, and the US econ­omy in a lull, an­a­lysts say the group has room to wait and see what hap­pens in the com­ing months.

But some also say that with the global econ­omy still fac­ing sig­nif­i­cant risks, in­clud­ing the pos­si­bil­ity that Bri­tain will vote on June 23 to pull out of the Euro­pean Union, the FOMC could hold off on in­creas­ing its bench­mark fed funds rate un­til the sec­ond half of the year.

Mar­kets were clearly not ex­pect­ing any change in pol­icy. The dol­lar, which weak­ened af­ter the last Fed meet­ing in March, was rel­a­tively steady at $1.1311 per euro.

And the in­di­ca­tion from CME fed fund fu­tures prices was that mar­kets do not ex­pect the next rate hike be­fore Septem­ber at the ear­li­est. When the FOMC made its first rate in­crease in more than nine years in De­cem­ber, putting the short-term bench­mark at a still ul- tra-low 0.25-0.50%, the ex­pec­ta­tion was for an­other 0.25 per­cent­age point rise each quar­ter over 2016.

But­so­far­thisyear,not­ede­conomist ChrisLowatFTNFi­nan­cial,whatis no­tableabout­theFOMCis“thelack of ur­gen­cy­byYel­lenandCo.”

Although one key de­ter­mi­nant of pol­icy, em­ploy­ment lev­els, has im­proved strongly each month, with the un­em­ploy­ment rate now at 4.9 per­cent, the other main in­di­ca­tor, in­fla­tion, re­mains very weak.

On top of that, the tur­moil in global mar­kets in the first quar­ter and slower global growth over­all has kept the Fed on the dovish side, even if a split among the FOMC mem­bers be­came ev­i­dent in the last meet­ing.

An­a­lysts ex­pect the US econ­omy grew at a pace of only 0.9% in the first quar­ter, down from 1.4% at the end of 2015. Data re­leased Tues­day showed the US in­dus­trial sec­tor still weak, with durable goods or­ders up just 1.4 per­cent year-onyear in the first quar­ter, and consumer con­fi­dence slightly lower.

So most eyes will be on how the FOMC char­ac­ter­izes US growth in its pol­icy state­ment at the close of the meet­ing on Wed­nes­day. Yellen will not be giv­ing a press con­fer­ence separately af­ter the meet­ing.

“The tone is likely to be a bit more pos­i­tive than in the March state­ment, con­sis­tent with an­other tight­en­ing move in June if data and mar­ket de­vel­op­ments are sup­port­ive,” said Jim O’Sul­li­van of High Fre­quency Eco­nom­ics.


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