US Federal Reserve looks at slower interest rate rises after global economy weakens

Policymakers forecast a 0.5 per cent rate rise driven by two separate increases this year

Fed Chair Janet Yellen has already raised rates twice in succesion (Getty)

US policymakers left interest rates unchanged last night but forecast slower hikes this year after highlighting the weakening global economy, pushing out investor expectations of a rate increase to September.

The Federal Reserve’s rate-setting committee, led by Janet Yellen, maintained the Fed overnight funds rate at 0.25 per cent to 0.5 per cent but indicated policymakers now think rates will rise more slowly this year.

Policymakers forecast a 0.5 per cent rate rise driven by two separate increases this year. This compares to a one percentage point rise spread across four increases predicted in December.

The long-term target for the lending rate was also reduced from 3.5 per cent to 3.3 per cent, highlighting concerns about the path of future economic growth.

“Most committee participants now expect that achieving economic outcomes similar to those anticipated in December will likely require a somewhat lower path for policy interest rates than foreseen at that time,” Ms Yellen said. “I would like to underscore, however, that the participants’ projections for the Federal funds rate, including the median path, are not a ‘plan’ for future policy. Policy is not on a preset course.”

The Fed lifted rates in December for the first time in seven years by 0.25 per cent, ending an unprecedented period of monetary policy where rates were effectively zero. Its decision last night shifted investor predictions about when rates would increase to later in the year.

Interest rate futures data showed the odds of the Fed hiking in June fell to 43.8 per cent from 53.6 per cent.

The first time the odds go over the 50 per cent mark is now September.

Fed statements are pored over by investors and analysts for subtle clues about what Fed policymakers are thinking and plan to do in future. One notable change from the Fed’s stance in December was a greater focus on risks posed by the global economy.

In the statement it said: “The committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labour market indicators will continue to strengthen. However, global economic and financial developments continue to pose risks.”

The Fed reaffirmed its 2 per cent inflation target over the medium term, but forecast lower inflation this year at 1.2 per cent from 1.6 per cent previously predicted.

On the jobs front, the body maintained its forecast for US unemployment this year, but predicted it would start to fall after that.