The Federal Reserve (Fed) put any further increase in US interest rates on hold on Wednesday, announcing rates will remain unchanged for at least another month.
The potential hike was postponed after fears of a slowdown in China and collapsing oil prices have rattled investors worldwide.
In its statement, released at the end of its two-day March meeting, the Fed said that “global economic and financial developments continue to pose risks” and that “inflation is expected to remain low in the near term, in part because of earlier declines in energy prices”.
“Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 0.25% to 0.5%,” according to the statement. “The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2% inflation.”
During the press conference following the meeting, Federal Reserve chair Janet Yellen stressed that the Fed’s “policy is not on a pre-set course” and that projections made by the committee are not promises. She also reiterated that every meeting is a live meeting, where the committee analyzes the most recent data. She would not rule out the possibility of an April rate hike.
Yellen struck a cautious tone during the press conference, repeatedly using words such as “prudent”, “gradual” and “carefully monitor”.
Most economists expected Yellen to hint at two interest rate hikes to come later this year – down from four hikes that were expected back in December, when the Fed raised interest rates for the first time since 2006.
The US central bank’s rate hike was the first since the recession. At the time, Yellen said the economy “has come a long way” and that the Fed was going to proceed gradually. In the months since, the Fed has adjusted its outlook, signaling fewer interest rate hikes in 2016 as it continues to monitor the situation abroad, including volatile oil prices and uncertainty in China.
There were some indications that the Fed would at least consider raising the interest rates at the March meeting. Richmond Fed president Jeffrey Lacker – who is not a voting member of the Fed’s policy-setting committee – said last month that recent job growth would justify multiple rate hikes this year. That same month, Kansas City Fed president Esther George, who is a voting member, said that the central bank should consider a rate hike in March.
“The further improvement in labor market conditions and the jump in core inflation means that the economic data has given the Fed all the excuse it needs to raise rates today,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, a financial intelligence provider. According to him, the chance of a March hike was small mainly due to the fact that the Fed is “reluctant to surprise investors”. He added that not raising interest rates this month is a “big mistake”.
“Dr Yellen and her colleagues, in our view, are making the grave mistake of overweighting the importance of the manufacturing sector and the stock market ... Dr Yellen and her colleagues are focusing on events outside the US simply because they can,” he said. “The domestic data, as of right now, are not unduly alarming.”
Most economists, however, predict that the next hike will be announced after the Fed meets 14-15 June.
“The most prominent risk in January – the tightening in financial conditions at the start of the year – has receded,” wrote Goldman Sachs economists Zach Pandl and Jan Hatzius. “As a result, Chair Yellen will likely indicate that the committee remains on track to raise rates again next quarter.”
Goldman Sachs economists are not the only ones who expect the Federal Reserve to raise interest rates in the coming months. According to a recent Reuters survey, economists expect the next rate hike to come before the end of June, followed by one before the end of the year. About 60% of economists expect the next rate hike to come by mid-year.
Inflation is the main reason why some expect the Fed to hold off on raising the interest rates in the coming months. The US inflation remains below the 2% target set out by the Fed and is not expected to rise near 2% even by mid-2017.
When she testified in front of the US Congress in February, Yellen noted that US financial conditions have become less supportive of growth. Mainly, the Fed chair was concerned about the turmoil in the markets and said that if it were to continue, it could act as a brake on the economy and affect the jobs market. In January, the US unemployment rate dropped below 5% even as the number of jobs created in January fell short of expectations. By end of February, job creation was up once again and beat expectations with 242,000 jobs created.