The US Federal Reserve (Fed) has announced, Wednesday, January 27, its concern about the current financial turmoil and the slowdown in global growth. Following a two-day meeting of its Monetary Policy Committee, the central bank left its key rates unchanged. Despite a somewhat pessimistic speech that adopted in December, at the previous meeting, the Fed, however, continues to forecast an increase “gradual” its rates over the next few months.
After raising interest rates for the first time in nine years, six weeks ago, the Fed has slightly changed tone. “Economic growth [US] slowed at the end of the year” , she says in a statement. Furthermore, “The Committee closely monitors the global economy and financial developments and assesses their implications for the labor market and inflation” in the United States, she said. A diagnosis that was the subject of a unanimous vote in the Committee.
The Fed seems to have more and more difficult to gauge the impact on the US economy from lower oil and slowdown in a number of countries, starting with China. Despite progress on the labor market, buoyant consumption and the recovery of the housing market, the US economy is threatened from outside. The turmoil in financial markets could be liable to undermine consumer and business confidence, while the rising dollar begins to undermine exports.
While until now many market players projected a further increase in interest rates at the next Fed meeting on March 15 and 16, this probability has declined in recent days due to this turbulent context. “Overall, the changes in the release are consistent prudence” , says Joshua Shapiro, economist at MFR, anticipating “two increases this year” . A Reuters survey of investors indicated that they no longer expect only rise, a quarter point this year, as the Fed had raised in the month of December 4 increases over the year.
Higher prices in the medium term
The Central Bank recognizes that inflation in the US is expected to remain low in the short term due to lower oil prices. But “once the temporary effects of declines in energy and import prices will dissipate,” remains convinced that higher prices will accelerate “to medium term “ to move towards the 2% target it has set.
The publication Friday, January 29, the first estimate of US growth in the fourth quarter 2015 is expected to confirm the fears of the central bank in the current downturn, following a rise in the Gross Domestic Product (GDP) annual rate of 3.9% in the second quarter and 2% in the third.
A context which should encourage the Fed to be cautious. However, shortly before the Wednesday meeting, one of the US financial regulator, the Office of Financial Research, in its annual report, warned against too slowly raising interest rates, which could encourage investors to take more risk and, therefore, increase the vulnerability of the financial system to potential shocks. Between two evils, the Fed will have to decide.