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LBR LBO Summit

Fed delays rate hike expectations over Brexit

July 07, 2016 (LBO) – The U.S. Federal Reserve has expressed reservations about hiking interest rates again, given an uncertain economic outlook tied to the Brexit, according to minutes released of the June meeting.

Fed governor Daniel Tarullo said Wednesday the central bank should wait for more convincing evidence that inflation is closer to the Fed’s 2 percent target before raising short-term interest rates.

Because rates are so close to zero, the Fed has limited tools to respond if the economy slows down, another factor that argues for a wait-and-see approach, according to him.

“I look at this as an opportunity for greater maximum employment, in a context in which inflation is not at our stated target, not near our stated target, and hasn’t been so in quite some time,” he said in an interview with The Wall Street Journal. “This is not an economy that is running hot.”

Fed officials generally agreed at their June 14-15 meeting that it was “prudent to wait” for additional data before considering another rate rise, according to minutes of the session released Wednesday.

The Fed raised its benchmark federal-funds rate in December from near zero to a range between 0.25 percent and 0.5 percent.

Investors now see little chance the bank will raise rates at its meeting July 26-27, which just a 13 percent probability of a hike by December.

Federal Reserve Bank of New York President William Dudley voiced concern Wednesday about very low yields on 10-year Treasury notes, which could be a sign that investor expectations for growth and inflation are waning. Mr. Dudley, who had been meeting with local leaders at Binghamton University in New York, said low yields weren’t “completely good news.”

Fed Vice Chairman Stanley Fischer said Friday recent data suggest the U.S. economy “has done pretty well” since May, and he said those developments are “more important for the U.S. outlook…than Brexit all by itself.”