Federal Reserve policymakers meet this week for the first time since Britain voted to leave the European Union, and the referendum’s effects on financial markets and economic growth are likely to be a hot topic during the two-day gathering.
After all, central bank officials were so concerned about the fallout of a potential “leave” vote that they held off on increasing a key interest rate last month just days before British citizens went to the polls.
Stock markets in the United States and abroad tumbled and economists downgraded their growth forecasts in the wake of the Brexit results, causing experts to predict there was no chance the Fed would add to the turmoil by enacting a rate hike this summer.
But financial markets have bounced back, with major U.S. stock indexes hitting record highs last week. And recent economic indicators point toward stronger growth after a weak winter.
How much will that change the calculus of Fed officials?
Here’s what to expect when the meeting ends Wednesday with the release of a monetary policy statement at 11 a.m.
A rate hike would be a shocker
Even though financial markets appear to have shaken off the Brexit fallout, analysts don’t expect the benchmark federal funds rate to move from its current range of 0.25 to 0.5 percentage points.
Fed Chairwoman Janet L. Yellen and her colleagues on the policymaking Federal Open Market Committee like to lay the groundwork for a possible rate hike for weeks with subtle and not-so subtle public signals to avoid surprising investors. There have been none of those comments leading up to this week’s meeting.
In fact, Yellen, who would be the signaler-in-chief, hasn’t spoken publicly since the June 23 British vote.
“I think it would usher in a period of uncertainty, and it is very hard to predict, but there could be a period of financial market volatility that would negatively affect financial conditions and the U.S. economic outlook,” Yellen told a House hearing on June 21 of the effect of a vote to leave the European Union.
In the days after the vote, the odds of a July rate hike fell to zero according to the closely watched FedWatch Tool produced by the CME Group futures exchange.
By Tuesday, the odds had inched up to 2.4%, but that still indicated a rate hike was highly unlikely.
“In our view, not enough time has passed since the June meeting for the uncertainties that affected the outlook to be resolved,” economists Kevin Logan and Ryan Wang of HSBC Global Research said in a report this week.
See you in September — or even later
The Federal Open Market Committee’s next meeting is Sept. 20-21, giving Fed policymakers nearly two months to better assess the U.S. economy and the effects of the Brexit.
The meeting is preceded by the annual economic policy symposium held in late August in Jackson Hole, Wyo., by the Federal Reserve Bank of Kansas City. Yellen is scheduled to speak at the high-profile event and could indicate a rate hike is coming.
The September Federal Open Market Committee meeting also is followed by Yellen’s quarterly news conference, which would allow her to explain the Fed’s rationale for a hike.
There’s about a 26% chance of a September rate hike, according to the CME Group’s barometer.
If the Fed does not enact a rate hike in September, it probably would have to wait until December. The only meeting between then takes place Nov. 1-2, and Fed policymakers probably do not want to act less than a week before the U.S. presidential election.
“To make September viable, they’ve got to use this July meeting as a stepping stone to a potential rate hike,” said Greg McBride, chief financial analyst at Bankrate.com, a financial information website.
A more upbeat view of the jobs market
Another key reason why the Fed held off on a rate hike in June was concern about the health of the labor market.
After the United States added just 38,000 net new jobs in May — the fewest in five years — Yellen and Fed officials were worried, but cautioned they didn’t want to read too much into one report.
“It’s not impossible, I think by July, for example, we would see data that led us to believe that we’re on a perfectly fine course,” Yellen said after the June meeting.
And although the Labor Department later revised the May figure to only 11,000, she was right.
Job growth surged in June to 287,000. The unemployment rate increased to 4.9% last month, but about 414,000 people rejoined the labor force.
Fed policymakers won’t update their economic projections again until September. But look for them to revise the language from their June statement, which said there were indications that “the pace of improvement in the labor market has slowed.”
A more upbeat tone on the state of the labor market would signal a rate hike could come in September if the next two jobs reports don’t disappoint.
Wintertime blahs in the rearview mirror
In its June statement, the Federal Open Market Committee said that “economic activity appears to have picked up” after anemic first-quarter growth.
Reports since then have reinforced that view. The Federal Reserve Bank of Atlanta’s closely watched forecast is calling for a 2.4% annual growth rate in the second quarter — more than double the weak 1.1% pace over the winter.
The first real confirmation of a stronger second quarter won’t come until Friday, when the Commerce Department releases its first growth estimate for the April-June period.
Brexit is expected to have limited effect on U.S. economic growth, economists said. So look for the Federal Open Market Committee to repeat, or even strengthen, its language on the nation’s economy, opening the door to a possible September rate hike.
“The data is pointing us closer and closer to a rate hike and I think they need to acknowledge that in order to prep financial markets,” McBride said.