It is Not the UK’s ‘Leave’ Vote that Derailed the Fed’s Plans
Weaker-than-expected real growth in US jobs in recent months had forced US monetary policy makers to put off a rate hike at their meeting June meeting.
The data due early next month on June US NFP’s 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/years to unfold.
Financial markets spoke in the hours since the ‘leave’ outcome. US stock index futures dove and investors rushed for the safety of Gold and US Treasuries, pushing the yield on the benchmark 10-year T-Note below 1.5%, nearly a 4-year low, and the USD rose by more than 3% at one stage, the most in a day since Y 1978.
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, the next and perhaps the next.
They are pricing a possibility that the federal funds target rate may be lower in December than it is now, which is at 0.38% on average.
The following is the full text of a statement issued by the US Fed Friday following the UK’s vote to leave the EU, as ollows:
“The Federal Reserve is carefully monitoring developments in global financial markets, in cooperation with other central banks, following the results of the U.K. referendum on membership in the European Union. The Federal Reserve is prepared to provide dollar liquidity through its existing swap lines with central banks, as necessary, to address pressures in global funding markets, which could have adverse implications for the U.S. economy.”
The Fed’s outlook suggests it will opt for caution.
A Brexit could “negatively affect financial conditions and the US economic outlook,” US Fed Chairwoman Janet Yellen said a few days before the referendum.
“Financial conditions could tighten,” said Fed Governor Jerome Powell said the day before the vote, adding that “global developments, global weakness … are really important for the setting of U.S. monetary policy.”
Neither gave any indication 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, Ms. Yellen said this week.
The British departure from the EU deprives the 28-member EU of its 2nd-biggest economy behind Germany, and 1 of its 2 Key military powers, sending political shockwaves across the Continent.
Global events have stayed the plans of the Yellen Fed, which will not/cannot to do anything to curtail the anemic recovery from a deep recession in Y 2008.
Have a terrific weekend