Britain’s possible exit from the European Union (EU) has weighed heavily on the US Federal Reserve’s (Fed) recent decision to keep interest rates on hold.
The looming vote in the United Kingdom on whether to leave the European Union certainly contributed to the US central bank’s decision to leave interest rates unchanged, chair Janet Yellen said.
Last week, the Fed kept interest rates at between 0.25% and 0.5% in the face of economic and political uncertainties in the US and around the world.
The possibility of Britain’s possible exit from the European Union, dubbed ‘Brexit’ was one of the factors that led the US Federal Reserve to keep interest rates on hold, Yellen said.
On the June 23 vote in Britain on whether to quit the European Union or not, Yellen said: “Clearly this is a very important decision for the United Kingdom and Europe. It is a decision that could have consequences for economic and financial conditions in global financial markets. If it does so it could have consequences in turn for the US economic outlook that would be a factor in deciding on the appropriate path of policy.”
A vote by British citizens to leave the EU could possibly cause sharp swings in global financial markets and currency exchange rates.
London is a major global financial centre and some multinational banks have already warned that they could shift jobs out of Britain and to Europe if the UK decides to leave.
The US central bank said it expected a “slower path” for future rate rises. It raised rates in December for the first time in nearly a decade.
Fed policymakers did not reveal when rates might rise, but analysts say the door has been left open for an increase when they next meet at the end of July.
Yellen said: “Proceeding cautiously and raising our interest-rate target will allow us to verify that economic growth will return to a moderate pace, that the labour market will strengthen further, and that inflation will continue to make progress toward our 2% objective.”
The Fed said in a statement that the pace of improvement in the labour market had slowed. The US central bank, however, added that economic activity will expand at a moderate pace and labour market indicators will strengthen even with gradual rate increases.
The key consideration in the Fed “rate-hold” decision appeared to be the US jobs market.
But many economists believe Britain’s possible exit from the 28-member EU would add more uncertainty for the Fed as it seeks to “re-establish its rate-setting credibility in the face of skeptical markets”, which have now all but priced out a rate rise by the US central bank this year.
They fear a “leave” vote could unleash turmoil on global financial markets.
That said, there are conflicting signals on how Britons will vote, with betting odds suggesting they will opt to stay in the EU, and some polls showing a “leave” decision will win out.
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