Fed Leaves Rates Unchanged; Signals 2 Hikes Coming

Central bank acknowledges labor slowdown, but sees strong economic fundamentals.

Reviewed by: Jason Lange
Edited by: Jason Lange

Washington (Reuters) – The Federal Reserve kept interest rates unchanged on Wednesday and signaled it still plans two rate increases this year, saying it expects the U.S. job market to strengthen after a recent slowdown.

The U.S. central bank, however, lowered its economic growth forecasts for 2016 and 2017, and indicated it would be less aggressive in tightening monetary policy after the end of this year.

Fed policymakers gave no indication of when they might raise rates, though their projections leave the door open to an increase next month.

"The pace of improvement in the labor market has slowed," the Fed said in a statement. It added, however, that "economic activity will expand at a moderate pace and labor market indicators will strengthen" even with gradual rate increases.

2% GDP Forecast

Updated projections from Fed policymakers point to annual economic growth of only 2% for the foreseeable future, slightly lower than forecast at the March policy meeting.

Policymakers have been worried about potential weakness in the U.S. labor market and the possibility of financial turmoil if Britain votes next week to leave the European Union. The Fed statement on Wednesday made no reference to that vote.

"It's as dovish as the Fed can get without actually cutting rates. Even [Kansas City Fed President] Esther George withdrew her dissent. The path of rates is lower, which is a big dovish swing," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Fund Management.

Financial markets all but priced out a rate increase this year after the Fed statement, and U.S. short-term interest rate futures contracts rose. U.S. stocks held on to their premeeting gains.

No Dissents

The Fed left its target range for overnight lending rates between banks at between 0.25% to 0.50%, keeping on hold a campaign to lift borrowing costs that started late last year.

It raised rates in December for the first time in nearly a decade and signaled four increases were likely in 2016. Concerns about a global economic slowdown and volatility in financial markets subsequently reduced that number to two.

Although worries about the health of the global economy have eased, a sharp slowdown in U.S. hiring in May was unsettling. More recent data have indicated that last month's jobs report may have been a blip.

The Fed statement said economic activity appeared to have picked up since April.

Economists polled by Reuters had seen virtually no chance that the Fed would raise rates on Wednesday. Most had expected it to do so in July or September on a view that the U.S. job market would bounce back and Britain's EU referendum would not lead to a financial meltdown.

There were no dissents in the Fed's rate decision on Wednesday.


Jason Lange is a staff writer for Reuters.