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Fed meets on interest rates but markets eye June decision

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Weak inflation and the prospect of more financial turmoil ahead of Britain's Brexit vote are expected to keep US monetary policy on hold Wednesday when the Federal Reserve wraps up a two-day meeting.

[NEW YORK] Weak inflation and the prospect of more financial turmoil ahead of Britain's Brexit vote are expected to keep US monetary policy on hold Wednesday when the Federal Reserve wraps up a two-day meeting.

Markets were already focusing more on what might happen in June as the policy-setting Federal Open Market Committee waits to see if the US economy picks up from a first quarter lull.

With Chair Janet Yellen having tilted the divided Federal Open Market Committee to the dovish side in its March review, analysts say the group has room to wait and see what happens in the coming months.

Economists believe the US economy grew at a pace of only 0.9 per cent in the first quarter, down from 1.4 per cent at the end of 2015.

Data released on Tuesday showed the industrial sector still weak, with durable goods orders up just 1.4 per cent year-on-year in the first quarter, and consumer confidence slightly lower.

Even if those indicators show signs of improvement in the coming months, though, some economists say the still-significant international economic risks, including the possibility that Britain will vote on June 23 to pull out of the European Union, could lead the FOMC to hold off on increasing its benchmark fed funds rate until the second half of the year.

Markets were clearly not expecting any change in policy. The dollar, which weakened after the last Fed meeting in March, was relatively steady at US$1.1298 per euro.

And the indication from CME fed fund futures prices was that markets do not really expect the next rate hike before September at the earliest.

When the FOMC made its first rate increase in more than nine years in December, putting the short-term benchmark at a still ultra-low 0.25-0.50 per cent, the expectation was for another 0.25 percentage point rise each quarter over 2016.

But so far this year, noted economist Chris Low at FTN Financial, what is notable about the FOMC is "the lack of urgency by Yellen and Co."

Although one key determinant of policy, employment levels, has improved strongly each month, with the unemployment rate now at 4.9 per cent, the other main indicator, inflation, remains very weak.

But the Fed has also focused on another variable, the turbulence in global markets that has been spurred at least in part by its plans for tightening US monetary conditions.

Backing up the idea that events like Brexit and Chinese market volatility are on the mind of the FOMC, a study of Fed policy statements under Ms Yellen and under her predecessor Ben Bernanke by Standard Chartered showed an equal focus on stability, though Mr Bernanke led the central bank through the financial crisis and Ms Yellen's time has been easier.

"The Fed is attaching just as much significance to financial stability as it did during the recession," the study concluded.

"We expect that the minutes of the Fed's April meeting will continue the trend of emphasising financial variables, such as the most recent decline in market volatility."

Jim O'Sullivan of High Frequency Economics predicted the tone of the policy statement - Ms Yellen will not add any interpretation with a press conference - will be "a bit more positive than in the March statement, consistent with another tightening move in June if data and market developments are supportive." "That said, we don't expect any direct hint about potential tightening by then," he added.

AFP