Concerned About Job Growth, the Fed Backs Off Raising Rates

From Mises.org

06/16/2016 by

The Federal Open Market Committee (FOMC) decided yesterday to leave the target federal funds rate at between 0.25 and 0.50 percent. This was widely expected, given the dismal jobs report that was published two weeks ago and the uncertainty in the banking sector surrounding the UK’s upcoming Brexit vote. Some FOMC participants had in recent weeksexpressed uncertainty about raising rates because of the potential for instability in the banking sector if the UK votes to leave the European Union.

Language in this month’s FOMC statement was largely unchanged from April. The main changes in emphasis were that the FOMC appears to be more downbeat about job gains, stating that the “pace of improvement in the labor market has slowed”, although the Committee continues to believe that “labor market indicators will strengthen.” Additionally, the Committee claimed that household spending has strengthened, but it flagged business fixed investment as soft. References to strong job gains from the April statement were removed in the June statement. The FOMC still maintains that inflation is running below its 2 percent target and points to most measures of inflation expectations remaining little changed. Perhaps surprisingly, there was no mention of specific international factors such as Brexit that might factor into decision-making, only the same “the Committee continues to closely monitor inflation indicators and global economic and financial developments.”

Yesterday’s decision was passed unanimously. Kansas City Fed President Esther George, who dissented from the previous statement and favored a rate hike in April, voted in support of this month’s FOMC policy decision.

Since markets were largely expecting rates to remain steady, we expect no major ramifications from this announcement.

Finally, Fed Chairman Janet Yellen testifies before the Senate and the House of Representatives next week as part of her semiannual Humphrey-Hawkins testimony. Summer testimony has normally been held in July, so these earlier testimony dates are undoubtedly an attempt to provide more timely scrutiny of today’s FOMC decision.

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