Federal
Reserve policymakers decided in June that interest rate hikes should
stay on hold until they have a handle on the consequences of Britain’s
vote on EU membership, according to the minutes of the Fed’s June policy
meeting released on July 6.
The minutes of the June 14-15
meeting, which took place ahead of the June 23 referendum in which
Britons voted to leave the European Union, showed widespread unease over
the so-called “Brexit” vote, including among voting members on the
rate-setting Federal Open Market Committee.
“Members generally
agreed that, before assessing whether another step in removing monetary
accommodation was warranted, it was prudent to wait for additional data
on the consequences of the U.K. vote,” according to the minutes.
Worries
have only intensified since the vote and Fed Governor Daniel Tarullo
cited the rise in uncertainty on Wednesday when he argued for holding
off on rate hikes until inflation had turned decisively higher.
At
the June policy meeting, policymakers also cited a severe slowdown in
hiring by U.S. employers as a reason for leaving interest rates steady
last month, the minutes showed.
The Brexit vote shocked investors and triggered $2 trillion in losses in global stock markets the day after the referendum.
Anxieties
remain, with global financial conditions tightening as investors
anticipate it could take years before Britain and the EU agree to new
rules on finance, trade and immigration.
On July 6, U.S.
benchmark and long-dated Treasury yields hit record lows, with some
investors betting the Fed would keep rates on hold through 2017.
“We
would need to see a few months of good data … to support a hike,”
said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds
Management in Menomonee Falls, Wisconsin.
The dollar, which has
gained more than two percent against a basket of currencies since the
Brexit vote and could weigh on U.S. exporters, weakened slightly
following publication of the minutes.
Before the British vote,
the Fed had signaled two interest rate hikes would likely be needed this
year to keep the U.S. economy from eventually overheating.
But
since the British referendum, several Fed policymakers have said the
uncertainty warrants caution, including New York Fed President William
Dudley who said on Tuesday the Fed needed to be patient on rate
increases and that it was too soon to know the fallout from the British
decision.
A severe slowdown in hiring during May and weak
business investment even outside the sagging energy sector had raised
questions about the U.S. outlook even before the Brexit vote.
Still,
in the minutes of the June meeting, many Fed policymakers who
participated in the policy discussion stressed the sharpness of the
hiring slowdown could be statistical noise, and most argued the economy
would be ready for rate increases unless a financial or economic shock
knocks America off course, according to the minutes.
Since
the Brexit vote, the British pound has plunged 13 percent against the
dollar, including a 1 percent decline on Wednesday, and investors and
policymakers are watching out for further signs of financial stress that
could hit economic growth in America and worldwide.
“None
of us really knows the magnitude and I doubt there will be a moment
when people say Brexit is done,” Tarullo said on Wednesday. “There is a
good bit of uncertainty.”
