As Brexit vote looms, Fed expected

Growing economic uncertainties including the looming British vote on quitting the European Union should prevent the Federal Reserve from hiking interest rates Wednesday.

Analysts say the Fed's two-day policy meeting should wrap up with the central bankers opting to wait and see what happens when Britain votes in a referendum on Brexit next week.

That would be a relief to investors and borrowers around the world, with the benchmark federal funds rate a key determinant of financing costs in a broad range of markets.

But keeping Fed policy on hold will not likely quell the volatility that the Brexit vote has injected into markets.

According to polls, support for leaving the EU has only risen since Fed Chair Janet Yellen warned earlier this month that doing so "could have significant economic repercussions."

Yet the Brexit vote is only one of several worries that have caused officials of the Federal Open Market Committee to reverse course on plans for a midyear increase in the central bank's key short-term interest rate, now pegged at 0.25-0.50 percent.

After the Fed's late-April meeting, Yellen and others on the FOMC said that the economy appeared strong enough for them to go ahead with an increase in June or July, and some suggested further hikes later in the year.

But a strikingly bad May report on US employment, with the number of jobs created the lowest in nearly six years, surprised them.

And Yellen remains frustrated with still-weak inflation, and especially the fall in the market of inflation expectations, which could suggest that the Fed's efforts to stimulate spending and investment are failing.

Fresh data early Wednesday will support her concerns. Wholesale inflation data showed core prices -- those with volatile fuel and food stripped out -- declined 0.1 percent last month.

In addition, Fed figures showed that industrial output fell 0.4 percent in May and was down 1.4 percent year-on-year.

Together, all that will convince the Fed to keep its short-term rate unchanged, said Stuart Hoffman, chief economist at PNC Financial Services Group.

"The disappointing May employment report... and global financial market unease, much of it tied to the upcoming referendum in the United Kingdom on European Union membership, will keep the FOMC on hold," he said.

The focus from the markets will be on how optimistic or pessimistic the FOMC sounds in its statement and economic forecasts, and Yellen in her post-meeting press conference, on prospects for US growth for the rest of the year.

Many economists now expect the Fed will not move before September; Fed fund futures trading on the CME show the markets expect December at the earliest.

Hoffman though was more optimistic.

"Rates could move higher at the FOMC's late-July meeting if job growth rebounds in June as expected, financial market concerns fade, and inflation looks set to pick up," he said.

Source: AFP