U.S. Federal Reserve: American Economy Shrugged Off Brexit
The Fed is still reluctant to raise interest rates despite avoiding Brexit fallout.
Members of the U.S. Federal Open Market Committee have been dithering for months over whether the American economy is strong enough to withstand higher interest rates, which would raise the cost of borrowing. Minutes from their July meeting, released Wednesday, show that this uncertainty continues, but concerns about the economic fallout from Brexit in the United States have apparently been quelled.
According to the record of the Federal Reserve’s July 26-27 policy meeting, members were split on whether or not the strength in the U.S. job market, which added jobs in both May and June, would continue. They also said initial fears about Britain’s decision to leave the European Union — the so-called Brexit — proved unfounded. Still, Fed members were split on whether or not strong jobs and resiliency after the United Kingdom’s historic vote were enough to raise the cost of borrowing, something the Fed has done only once since 2006.
“Members generally agreed that, before taking another step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity,” according to the minutes released on Wednesday.
“Some … members anticipated that economic conditions would soon warrant taking another step in removing policy accommodation,” the Fed added. In plain English, this means they’re divided on whether to raise interest rates.
Last December, the Fed lifted borrowing costs from near zero to a benchmark range of .25 percent to .50 percent, meaning it was no longer free to borrow from the U.S. Central Bank — but still incredibly cheap. At that time, Fed officials indicated four interest rate hikes could come in 2016.
However, as concerns about the health of the U.S. economy lingered into the spring, and as Brexit loomed on the horizon, Fed officials decided not to change rates. This means it is still very cheap for businesses and consumers to borrow money, enabling continued U.S. economic growth.
Whether a rate hike will come before year’s end remains to be seen. Interest rates across Europe and in Japan are still negative, meaning their central banks are essentially pushing people to borrow and encouraging them to spend in what so far has been a futile effort to stimulate growth. Slowdowns in both places have dampened the desire for foreign consumers to buy U.S. products.
And the long-term impacts of the U.K. leaving Europe remain unknown, as the Fed notes. Data released this week paint a mixed picture. The number of people claiming jobless benefits fell by 8,600 in July, the first decrease since February. The U.K. Office for National Statistics insisted Tuesday there is no immediate impact from Brexit.
But according to the research firm Markit, the picture is not so rosy. In July, the combined services and manufacturing activity in Britain slid to its lowest level in seven years. The firm also found “dramatic deterioration” in the economy since Britain’s vote to leave the EU.
In addition, a weakened pound sterling and inflation concerns — the official inflation measure targeted by the Bank of England ticked up to 0.6 percent year-on-year in July from 0.5 percent in June, the highest level since November 2014 — are driving fears of a spike in food prices there.
For now, Brexit fallout has largely been limited to Britain. But the Fed’s reluctance to pull the trigger on a rate increase — which would have been a vote of confidence in the U.S. economy — shows not all the worries about the U.K.’s looming exit from the EU have gone away yet.
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