Fed remains cautious, keeps interest rates unchanged

January's ultra-low levels of $28 per barrel to just under $40 per barrel on Friday

U.S. interest rates were left unchanged at 0.5% during Wednesday’s Federal Reserve (Fed) meeting. The Fed stated that unemployment is getting better but they are waiting for inflation to meet the 2% target set by them. Moreover, the U.S. policymakers forecast that the economy will continue growing at a moderate pace.

Fed raised interest rates in December 2015 for the first time since 2008. Although there were expectations by the U.S. policymakers in December that the Fed would further increase interest rates four times during 2016, it now expects the increases to take place only twice during the year.

Fed Chairwoman Janet Yellen stated during a press conference following the Fed meeting that the decision to keep interest rates unchanged enables for a more cautious approach and to make sure that unemployment levels continue to decrease through the current period of global economic volatility. The statement of the Federal Open Market Committee (FOMC) that was released on Wednesday was in the same line with Ms Yellen’s comments as it said that there is improvement of the U.S. economy but there is also negative impact of the weakening global economic growth. Moreover, the statement said that household spending levels have increased but business investment and export levels have not been strong.

Oil prices, an important consideration behind the Fed’s decisions

The Fed’s latest decision of retaining the interest rates at the same level and the and the scaling down of the number of rate hikes during the current year from four to just two can be seen as a warning that there are still obstacles posed by weak global economic growth and that there is more time needed until the U.S. economy recovers to adequate levels. However, the latest Consumer Price Index (CPI) report released by the U.S. Bureau of Labor Statistics showed that February’s index has increased by 1% during the last twelve months. The result was unexpected given that analysts were only expecting an increase of 0.9% and led some investors to forecast the next rate hike to take place during FOMC’s April meeting.

The two primal variables that affect the Fed’s decision on increasing interest rates are inflation and unemployment levels. There is concrete evidence that the labour market is improving as the latest report for January showed that the unemployment rate remained under the 5% level, whereas the number of people in search of work in the U.S. is also increasing.

Other than employment and levels, oil prices have also been an important consideration behind the Fed’s decisions. The price of crude oil recently recovered from January’s ultra-low levels of $28 per barrel to just under $40 per barrel on Friday and improved the financial forecasts of a number of oil companies. Despite last week’s decision, the Fed’s Chairwoman said that the current stance of the central bank is not certain and could be amended depending on upcoming economic developments.

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