Federal Reserve less upbeat on US outlook

The Federal Reserve kept interest rates unchanged yesterday but signalled it plans two rate increases this year, saying it expects the US job market to strengthen after a recent slowdown.

The US 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 labour market has slowed,” the Fed said in a statement. It added, however, that “economic activity will expand at a moderate pace and labour market indicators will strengthen” even with gradual rate increases.

Updated projections from Fed policymakers point to annual US GDP 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 US labour market and the possibility of financial turmoil if Britain votes next week to leave the EU.

The Fed statement, yesterday, made no reference to that vote. The Fed left its target range for overnight lending rates between banks at between 0.25% and 0.50%, keeping on hold a campaign to lift borrowing costs that started late last year.

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

Most commentators expect the Fed to raise rates in July or September on a view that the US job market will bounce back and Britain’s EU referendum will not lead to a financial meltdown.

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

* Reuters