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The US Federal Reserve, already undecided on when next to raise interest rates, now has one more reason to wait: Britain’s vote on Thursday to leave the European Union.
Not that the Fed needed another reason.
Weaker-than-expected growth in US jobs in recent months have already forced US central bankers to put off a rate hike at their meeting last week.
But while data due early next month on June US payrolls growth could help clear up doubts about the strength of the labor market, the political and economic consequences of Britain’s exit from the EU will take months or years to unfold.
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Financial markets have already spoken, emphatically, in the hours since the ‘leave’ outcome in the so-called Brexit referendum became evident.
Interest rate futures markets rallied so hard that they have erased any probability of an increase in the Fed’s benchmark overnight lending rate for both this year and next. In fact, they are pricing a possibility that the federal funds target rate may be lower in December than it is now, which is around 0.38 percent on average.
The Fed’s recent playbook suggests central bankers will opt for caution.
Fed officials’ comments in the run-up to this week’s British referendum signal this time will be no different.
Neither, however, gave any indication of how big an impact the decision might have, and the Fed has no plans for an emergency meeting in the event of a leave vote, Chair Janet Yellen said this week.
Joe Gagnon, a senior fellow at the Peterson Institute for International Economics, expected the Fed to raise rates once this year, so long as the British opted to remain in the European Union.
But a Brexit, he said, will throw the UK into recession, slowing US exports, payrolls expansion, economic growth to “the equivalent of at least a 25 basis point hike” in Fed interest rates, Gagnon said.
If the slowdown deals a severe blow to Europe, which in Gagnon’s view is a less likely outcome, the Fed could be forced to delay interest rate rises further.
However, not all subscribe to that view. Capital Economics economist Paul Ashworth, for instance, predicts a “trivial” impact on the US economy, given that US exports to the UK account for less than half a percent of GDP.
Yet global events have repeatedly stayed the hand of the Yellen Fed, which is already reluctant about curtailing what has been a modest recovery from a deep recession in 2008.
Eventually, however, US employment, wage rises, inflation and economic growth will most likely enable the Fed to normalise interest rates, even though the full impact of Brexit won’t be known for years.
(At The Quint, we question everything. Play an active role in shaping our journalism by becoming a member today.)