Federal Reserve unsure about raising interest rates amid Brexit, U.S. labor report

By Doug G. Ware  |  July 6, 2016 at 7:39 PM
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WASHINGTON, July 6 (UPI) -- At its latest meeting in June, the U.S. central bank was less confident about continuing to raise key interest rates this year, as planned -- due to a changing global financial picture ushered in by Britain's departure from the European Union and other domestic factors.

According to the official minutes of the June 14-15 meeting, released Wednesday, the Federal Reserve wanted to take a wait-and-see approach for rate hikes in the near term to be certain the U.S. economy can withstand them -- and to allow fiscal policy-makers more tools to react if the domestic markets begin sagging again.

In the report, the Federal Reserve cited multiple factors in stating that further interest rate hikes may occur later than previously forecast -- partly due to the fiscal repercussions from Britain's EU exit, known colloquially as the "Brexit."

"The manager of the System Open Market Account reviewed the apparent effects on financial markets of changes in the perceived odds that the United Kingdom would vote in a referendum on June 23 to leave the European Union," the Fed stated in the minutes.

At its June meeting, policy-makers agreed to stand pat to ensure continuing improvement of the U.S. and global economies, and to make sure no new threats emerged following Britain's referendum vote.

Britain's EU exit vote had far-reaching effects in markets around the world and, at one point, reduced the value of the British pound to its lowest level since 1985.

Additionally, the Fed cited uncertainty surrounding the U.S. labor market as another reason for its adjusted outlook. Last month, the Federal Reserve said a lackluster jobs report for May could influence potential rate hikes in 2016

Janet L. Yellen, Chairwoman of the Board of Governors of the Federal Reserve, delivers the Semiannual Monetary Policy Report to Congress during a Senate Banking, Housing and Urban Affairs Committee hearing in Washington, D.C., on June 21, 2016. Wednesday, the Fed's official minutes from its June meeting said Yellen and other board members were less confident about raising key interest rates in the near future due to questionable U.S. labor conditions and Britain's vote to exit the European Union. File Photo by Kevin Dietsch/UPI

Federal Open Market Committee policy-makers see an inflation rate of 2 percent as the ideal and preferred threshold for raising rates. A 2 percent inflation rate has traditionally served as the benchmark gauge for determining whether the economy can withstand further interest rate hikes.

"The economic projections provided by the members of the Board of Governors and the presidents of the Federal Reserve Banks inform discussions of monetary policy among policymakers and can aid public understanding of the basis for policy actions. Considerable uncertainty attends these projections, however," the Fed said in the minutes.

"As with real activity and inflation, the outlook for the future path of the federal funds rate is subject to considerable uncertainty," it added. "This uncertainty arises primarily because each participant's assessment of the appropriate stance of monetary policy depends importantly on the evolution of real activity and inflation over time. If economic conditions evolve in an unexpected manner, then assessments of the appropriate setting of the federal funds rate would change from that point forward."

Another concern is that if the domestic economy sees an abrupt downturn, with rates still near zero, the Fed will not have much room to maneuver and take corrective action.

The Fed and its chairwoman, Janet Yellen, said in recent weeks that indicators before the June meeting suggested that additonal hikes to the federal funds rate were economically acceptable.

In December, the central bank raised interest rates for the first time in nearly a decade, largely due to the 2008-09 financial crisis -- rising from near zero to a range between 0.25 and 0.5 percent. However, it has yet to raise rates so far in 2016.

"I look at this as an opportunity for greater maximum employment, in a context in which inflation is not at our stated target, not near our stated target, and hasn't been so in quite some time," Fed governor Daniel Tarullo told The Wall Street Journal Wednesday. "This is not an economy that is running hot."

Wednesday's minutes indicate that it's unlikely the Federal Reserve will decide to increase benchmark rates at its next meeting, scheduled for July 26 and 27, either.

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