US Fed Keeps Policy Rates Steady, Signals Fewer Hikes This Year

US Federal Reserve signals only two interest rate hikes this year.

• Policymakers expect only 50 bps increase in interest rates this year, a shift from the four hikes the Fed suggested in December.
  
• Fed says US continues to face risk from uncertain global economy.
  
• Fed lowers estimate of targeted lending rate in the long run to 3.30 percent from 3.50 percent.
  
• Unemployment rate expected to decline to 4.7 percent by the end of the year.
  

The Federal Reserve held interest rates steady on Wednesday and indicated that moderate US economic growth and “strong job gains” would allow it to tighten policy this year, with fresh projections showing policymakers expected two quarter-point hikes by the year’s end, half the number seen in December.

The US central bank, however, noted that the United States continues to face risks from an uncertain global economy.

A range of recent indicators, including strong job gains, points to additional strengthening of the labour market. Inflation picked up in recent months. However, global economic and financial developments continue to pose risks” and will keep inflation low for the remainder of 2016.

US Federal Reserve Statement

The Fed kept the target range for its overnight lending rate at 0.25 percent to 0.50 percent.

‘Moderate Growth’ in US Economy

In a press conference, Fed Chair Janet Yellen said it remained to be seen whether a recent firming in US core inflation, which excludes volatile energy and food components, would be sustained.

Fed policymakers projected weaker economic growth and lower inflation this year and lowered their estimate of where the targeted lending rate would be in the long run to 3.30 percent from 3.50 percent – a signal that the economic recovery would remain tepid.

The interest rate outlook is a shift from the four hikes expected when the Fed raised rates in December for the first time in nearly a decade. The majority of policymakers now said they expected it would be appropriate to raise rates by about a half a percentage point by the end of this year.

Our first take on this is that it probably leans slightly more dovish, relative to expectations.

Tom Porcelli, Chief US Economist, RBC Capital Markets

Improvement in Labour Market

The new rate outlook came as the Fed attempts to steer through recent global market volatility and keep its rate hike plans somewhat intact.

Fed policymakers also see continued improvement in the job market, with the unemployment rate expected to decline to 4.7 percent by the end of the year and fall further in 2017 and 2018.

Fed policymakers marked down their forecast for inflation this year to 1.2 percent from 1.6 percent, but see it recovering to close to the central bank’s 2 percent medium-term target next year.

Kansas City Fed President Esther George was the only policymaker to dissent on Wednesday.