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Fed Says Brexit, Slowing Labor Market Were Factors in Decision to Leave Rates Unchanged

Members divided on whether to hike rates based on economic indicators

Janet Yellen
Janet Yellen / AP
July 6, 2016

The Federal Reserve said that uncertainty over the United Kingdom’s decision to leave the European Union, a slowed labor market, and economic uncertainty were factors in its decision to leave the federal funds rate unchanged, according to the minutes from the Federal Open Market Committee’s June meeting.

"After assessing the outlook for economic activity, the labor market, and inflation, and after weighing the uncertainties associated with the outlook, members agreed to leave the target range for the federal funds rate unchanged," the minutes read. "An additional factor in the Committee’s policy deliberations was the upcoming U.K. referendum on membership in the European Union. Members noted the considerable uncertainty about the outcome of the vote and its potential economic and financial market consequences."

At their June meeting, the policy making arm of the Federal Reserve decided to leave the federal funds rate unchanged at a quarter of a percentage point. The Fed evaluates incoming data on the labor market and inflation indicators to see if their dual objectives of maximum employment and 2 percent inflation are being met.

According to the minutes, board members agreed that before increasing the federal funds rate higher, it was prudent that they wait for additional data regarding the labor market and information that would allow them to assess the consequences of the Brexit vote to evaluate global financial conditions.

While most participants said that raising the federal funds rate would be appropriate if incoming data suggested that economic growth had picked up, some participants were uncertain.

"Several of them noted downside risks to the outlook for growth in economic activity and for further improvement in labor market conditions, including the possibility that the sharp slowdown in employment gains and the continued weakness in business fixed investment signaled a downshift in economic growth, as well as the potential for global economic or financial shocks," the minutes said.

Published under: Federal Reserve