The US Federal Reserve announced it would not raise interest rates on Wednesday afternoon, blaming uncertainty over the UK’s potential exit from the EU and slowing economic growth for the decision.
The Fed has kept rates at close to zero since the recession. In December it raised them a quarter percentage point for the first time since 2006 and indicated more rises would come, a decision the Fed chair, Janet Yellen, was quizzed on during today’s press conference. Yellen said she did not believe raising rates had led to the current slowdown in growth.
Yellen also said that after a two-day meeting the looming Brexit – the UK’s referendum on whether to leave the EU – had pushed the Fed’s committee members to put a further rise on hold.
“Brexit, the upcoming UK decision on whether or not to leave the European Union, is something we discussed, and I think it’s fair to say it’s one of the factors that factored into today’s decisions,” Yellen said. “Clearly this is a very important decision for the United Kingdom and for Europe. It is a decision that could have consequences for global financial markets. It could have consequences in turn for the US economic outlook.”
The Fed also announced its calculations that US economic growth will slow for the rest of the year and remain flat through 2018.
The Federal Open Market Committee (FOMC), chaired by Yellen, also reduced its interest rate projections for 2017 and 2018.
The decision not to raise rates was applauded by Washington DC thinktank the Economic Policy Institute. “Today’s decision by the Federal Reserve to keep interest rates unchanged was the right one,” wrote policy director Josh Bivens. “There is no sign in the economic data that a durable acceleration in inflationary pressures is brewing and needs to be stopped by the Fed beginning to slow the economy.” Bivens called “the still-damaged labor market” a drag on the US economy.
“The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run,” said the committee in a statement. “However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
Expectations for a rate rise fell after the May jobs report was released. The US added just 38,000 new jobs, according to the Department of Labor. It was the second straight month of disappointing jobs growth, and in unexpected ways. Though weak exports and lower energy prices were predictable, other factors were not: “Business investment outside of energy was particularly weak during the winter and appears to have remained so during the spring,” she said.
Still, Yellen was optimistic: “I don’t expect that progress in the labor market has come to an end,” she told reporters.
