Fed holds interest rates, but ECB tipped for July cut
The US Federal Reserve has held interest rates steady but signalled possible rate cuts of as much as half a percentage point over the remainder of this year, as it responded to increased economic uncertainty and a drop in expected inflation.
The US central bank said it “will act as appropriate to sustain” the expansion as it approaches the 10-year mark and dropped a promise to be “patient” in adjusting rates. Nearly half its policymakers show a willingness to lower borrowing costs over the next six months.
While new economic projections showed policymakers’ views of growth and unemployment largely unchanged, they saw headline inflation at 1.5% for the year, down from the 1.8% projected in March. They expect to miss their 2% inflation target next year as well.
Seven of 17 policymakers said they expected it would be appropriate to cut rates by half of a percentage point by the end of 2019, and an eighth saw a rate cut of a quarter point as appropriate.
The long-run federal funds rate, a barometer for the state of the economy over the long term, was cut to 2.50% from 2.80%.
US stocks turned higher after the Fed’s statement was released, with the benchmark S&P 500 up about 0.25% from the previous day’s close. Ahead of the statement, stocks had been fractionally lower on the day.
Yields on US Treasury securities, which had been modestly higher before the rate decision was released, slipped. The 10-year Treasury note yield was down one basis point at just shy of 2.05%. The dollar weakened against the euro. The Fed’s comments follow Commerzbank saying that it has now brought forward its expectations for an interest rate cut from the European Central Bank to July from the fourth quarter of this year.
The change in forecast follows comments by ECB chief Mario Draghi on Tuesday that the central bank will ease policy again if inflation fails to accelerate.
“[Tuesday’s] speech in Sintra may well be remembered as opening the door for the next round of large-scale stimulus, similar to his Jackson Hole speech in 2014,” analysts at Commerzbank said in a note.
