US Federal Reserve sounds a note of caution keeps interest rates on hold

28th January 2016


As widely expected and given the volatility engulfing markets since the start of the year, the US central bank is keeping its key interest rates on hold for the time being.

Sounding a note of caution, the US Federal Reserve, said in a statement that it was “closely monitoring global economic and financial developments” and that it is assessing their implications for the labour market and inflation, and for “the balance of risks to the outlook”.

US interest rates, which are set by the Fed, are now at between 0.25% and 0.5% after it hiked the cost of borrowing first time in nearly 10 years back in December.

While the Fed did not give an indication of when rates would next rise, it did however say that it anticipated that the jobs market would remain robust and that it expected inflation to rise.

Capital Economics chief US economist Paul Ashworth highlighted that the Fed certainly did not completely rule out a March rate hike but he added that it was notable that it was no longer willing to describe the risks to the outlook as “balanced”.

He said: “The growth of consumption and business investment is now described as ‘moderate’ whereas back in December it was described as ‘solid’.

“The slowdown in inventory investment also receives an explicit reference. At the same time, the Fed stressed that labour market conditions ‘improved further’ with ‘strong’ job gains.”

Overall Ashworth believes that a March rate hike is still possible, but he said it will require signs of improvement in the incoming economic data and financial markets that may not show up quickly enough.

He added: “Nevertheless, we still think that once the worst fears about China blow over and US economic growth rebounds, the Fed will end up raising interest rates more rapidly that expected in the second half of this year. We expect the fed funds rate to reach 1.5% to 1.75% by end-2016.”

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