Fed Signals No Rush To Raise Rates

Moderation of U.S. recovery tempers outlook for increases.

Reviewed by: Lindsay Dunsmuir
Edited by: Lindsay Dunsmuir
Washington (Reuters) – The Federal Reserve held interest rates unchanged on Wednesday, and while it left the door open to a hike in June, its statement implied that it was in no hurry to follow on from its December rate rise.

The U.S. central bank's policy-setting committee said the labor market had improved further despite a recent economic slowdown and that it was keeping a close eye on inflation.

It added that global economic head winds remained on its radar, but removed a specific reference from its last policy statement to the risks they posed.

Traders Eye September Hike

Traders kept their bets that the first rise of 2016 would come in September, and less than even odds that a second hike would come by December. Fed rate setters forecast two hikes this year.

"The committee continues to closely monitor inflation indicators and global economic and financial developments," the Fed said in a statement following a two-day meeting.

It kept the target range for its overnight lending rate in a range of 0.25% to 0.50%, in line with expectations in a Reuters poll. The Fed hiked rates in December for the first time in nearly a decade.

For the third-consecutive meeting, it did not include any mention of the balance of risks to the economy.

Incomes Rising At ‘Solid Rate’

However, the Fed noted that while growth in household spending had moderated, households' real income had risen at a "solid rate," and consumer sentiment remained high.

Inflation has picked up recently, but the Fed on Wednesday said it was expected to remain low in the near term, in part because of earlier declines in energy prices. It added that it remained confident inflation would rise to its 2% target over the medium term.

Despite strong job gains and an unemployment rate of 4.9%, Fed policymakers have previously said they would proceed cautiously in raising rates again due to the uncertainty in the world economy and a lack of inflation pressures at home.

Stocks Erase Losses, Dollar Rises

A global equity sell-off and the tightening of financial markets earlier this year—largely on concerns of a slowdown in China—prompted the Fed's policy-setting committee last month to dial back rate-hike expectations for the year.

Stocks pared earlier losses after the FOMC meeting, while the dollar turned positive.

"I think they are in a wait-and-see mode. June may be too early to hike unless we see a decent pickup in the inflation numbers. To me, that seems highly unlikely,” said Brian Jacobsen, chief portfolio strategist at Wells Fargo Asset Management.

Fed policymakers currently project two rate hikes in 2016, compared with the four hikes forecast in December.

Stocks have continued to rise since the Fed's March policy meeting, and investors' nerves have been soothed by an apparent pickup in China's economy.