Fed likely to avoid rate hike before British vote EU

Fri Jun 3, 2016 3:42pm EDT
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By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) - The U.S. Federal Reserve may delay an interest rate rise at its June meeting due to concern about the economic fallout of Britain's impending vote on whether to leave the European Union.

The geopolitical risk related to the vote will likely delay any U.S. rate increase until at least July, despite apparent consensus among Fed officials that a rate hike is warranted by stronger U.S. economic growth and a tight labor market.

The Fed's June 14-15 policy meeting will come just a week before the British vote on June 23.

A "leave" vote, dubbed as "Brexit," may roil financial markets, cause credit spreads to widen, trigger a rush into safe assets, and push up the U.S. dollar.

The dollar’s recent stability is one reason the Fed has become more comfortable with raising rates, so officials may want to let the threat of Brexit pass before moving to tighten financial conditions.

Fed Board Governor Daniel Tarullo on Thursday joined a chorus of those expressing concern about the British vote, telling Bloomberg that Brexit would be a "factor" he would consider at the Fed's June policy meeting.

Recent polls suggest voters in Britain, Europe's second-biggest economy and its most influential financial center, were evenly split on whether to stay in the EU or leave.

All three Fed Board governors who spoke recently suggested Brexit will weigh against a June rate hike, including Lael Brainard who on Friday said "prudent risk-management" calls for waiting for more data and greater certainty over the British vote before raising rates.   Continued...

Federal Reserve Chair Janet Yellen speaks at the Radcliffe Institute for Advanced Studies at Harvard University in Cambridge, Massachusetts, U.S. May 27, 2016.  REUTERS/Brian Snyder