Fed keeps interest rates unchanged, signals fewer future hikes

By Jason Lange and Howard Schneider

WASHINGTON (Reuters) – The U.S. Federal Reserve kept interest rates unchanged on Wednesday and signaled it still planned to raise rates twice in 2016, though it said slower economic growth would crimp the pace of monetary policy tightening in future years.

The central bank’s decision to stick with its 2016 rate path, however, appeared shakier, with six of its 17 policymakers projecting just one increase this year. Only one Fed policymaker had done so when economic forecasts were last issued in March.

A sharp slowdown in U.S. hiring in May had fueled doubts about the strength of the labor market going into the Fed’s two-day policy meeting. Fed Chair Janet Yellen acknowledged the need to see clear signs of economic strength before lifting rates.

“We do need to make sure that there’s sufficient momentum,” Yellen told a news conference.

The Fed also said the economy would grow only 2 percent this year and in 2017, 0.1 percentage point lower than previously forecast for each year.

It also cut its longer-term view of the appropriate federal funds rate, its benchmark lending rate, by a quarter point to 3 percent and indicated it would be less aggressive in raising rates after the end of this year.

Yellen was not clear on whether a rate increase could come at the next policy meeting in late July or whether the central bank would wait for a slew of firmer data as it headed into its September meeting.

“I’m not comfortable to say it’s in the next meeting or two, but it could be,” Yellen said. “It’s not impossible that by July, for example, we would see data that led us to believe that we are in a perfectly fine course.”

Yellen said the U.S. economy appeared to have gained momentum since April, but that the labor market had lost some steam.

She acknowledged Britain’s possible exit from the European Union was one of the factors in the latest rate decision, saying the June 23 referendum would have “consequences for economic and financial conditions in global financial markets.”

Financial markets all but priced out a rate increase this year after the Fed statement, and U.S. short-term interest rate futures contracts rose. U.S. stocks closed lower.

‘LITTLE STOMACH’

The rate decision was unanimous, with Kansas City Fed President Esther George, considered among the policymakers most eager to raise rates, voting with her colleagues on the Federal Open Market Committee (FOMC). George dissented at the prior two meetings.

“This FOMC clearly has little stomach to raise rates,” said Stephen Stanley, an economist at Amherst Pierpont Securities.

The Fed’s benchmark overnight lending rate remains in a range of 0.25 percent to 0.50 percent.

The central bank raised rates in December for the first time in nearly a decade and initially signaled four increases were likely for 2016. Concerns about a global economic slowdown and volatility in financial markets subsequently reduced that number to two.

Worries about the health of the global economy have eased, however, and more recent U.S. data have indicated that last month’s jobs report may have been a blip.

Economists polled by Reuters had seen virtually no chance that the Fed would raise rates on Wednesday.

(Reporting by Jason Lange and Howard Schneider; Additional reporting by David Chance; Editing by Chizu Nomiyama and Paul Simao)