US Fed holds rates steady, sees fewer hikes in 2016

The US Federal Reserve pared its plans on Wednesday for raising key interest rates, citing global volatility and low inflation as main pressures that risk slowing the U.S. economy.

Fed officials now see only two adjustments this year, compared to the previous forecast of four made during their last meeting in January.

“The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation,” The Federal Open Market Committee (FOMC) said in a statement following a two-day policy meeting.

The decision did not come as a surprise to many Gulf and Middle East analysts, who had anticipated slower global growth to overshadow improving economic indicators in the U.S.

“The statement suggests that volatility in global markets is still hindering the process of normalizing monetary policy, but it does not appear to preclude that a rate hike could take place in the next few months,” Tim Fox, chief economist at Emirates NBD told Argaam.

Global markets are expected to cheer the latest policy announcement initially. Yet, within Gulf Arab markets, oil prices will continue to be the main factor influencing investor sentiment, said Mohamed Abdelmeguid, Middle East economist at the London-based Economist Intelligence Unit (EIU).

“Despite the rates being unchanged, debt market conditions are still on a downward trend for most GCC economies and will remain so in 2016,” Abdelmeguid said. “Basically, the cost of borrowing will continue to rise.”

He also explained how lending conditions within the regional banking sector have changed since the Fed last increased rates at the end of last year.

“Tightening banking sector liquidity, along with the U.S. Federal Reserve's policy rate increase in December, have pushed money market rates higher and meant that fewer banks had participated in previous auctions,” Abdelmeguid added.

Write to Joumana Saad at joumana.saad@argaamplus.com