Brexit vote means Fed stays put

Fri Jun 24, 2016 12:10pm EDT
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By Ann Saphir

SAN FRANCISCO (Reuters) - Britain's vote to leave the European Union has thrown financial markets into turmoil and means the U.S. Federal Reserve's ambitions for two rate rises this year have been placed on hold.

The Fed on Friday sought to reassure markets that it would provide liquidity as needed using swap lines in place with other central banks, including the Bank of England as the pound touched a 1985 low against the dollar, world stocks lost more than $2 trillion of their value, and investors rushed for the safety of U.S. Treasuries, pushing the yield on the benchmark 10-year note to a four-year low.

Traders of U.S.-interest rate futures even began to price in a small chance of a Fed rate cut, and now see little chance of any rate hike until the end of next year.

"One can forget about rate hikes in the near term," said Thomas Costerg, New York-based economist at Standard Chartered Bank. "What I'm worried about is that the Brexit vote could be the straw that breaks the back of the U.S. growth picture."

Market volatility in the past year, a stronger U.S. dollar in the past couple of years that has crimped exporters' profits, low oil prices and inflation, and weaker economic growth in U.S. trading partners have kept Fed monetary policy on hold at least twice in the past year.

An interview with Kansas City Fed President Esther George published Friday but conducted before the Brexit outcome was known suggested she still believes U.S. rates need to rise soon.

But comments from other Fed officials in the run-up to the referendum suggest they worried about exactly the kinds of shocks that rippled through financial markets on Friday.

Fed Chair Janet Yellen had warned prior to the vote that Brexit could "negatively affect financial conditions and the U.S. economic outlook".   Continued...

Federal Reserve Board Chair Janet Yellen testifies before the Senate Banking Committee at Capitol Hill in Washington, U.S., June 21, 2016. REUTERS/Carlos Barria -