The Federal Reserve left its benchmark interest rate unchanged on Wednesday amid fresh doubts about the health of the U.S. job market and growing anxiety among investors that Britain might leave the European Union.
The Fed has repeatedly been frustrated in its attempts to wean the American economy off the massive stimulus that the central bank has been providing since the 2008 financial crisis. In December, it raised interest rates for the first time since the recession and expected to increase them four more times this year as the recovery picked up steam. Instead, the economy slowed to a crawl over the winter, and by the time it strengthened this spring, job growth began to stumble. The Fed has yet to hike rates again.
"Recent economic indicators have been mixed, suggesting that our cautious approach to adjusting monetary policy remains appropriate," Fed Chair Janet Yellen said during a news conference after the central bank wrapped up its two-day meeting in Washington on Wednesday.
The Fed policy-setting committee's vote to hold rates steady was unanimous. Kansas City Fed President Esther George had dissented at two previous meetings in favor of increasing the target rate, but she supported the decision Wednesday.
Investors have long been skeptical of the potential for Fed action at this meeting. Britain is slated to hold a referendum next week over whether to remain in the European Union and a decision to exit — or, “Brexit” — threatens to upend long-established political order and rattle financial markets around the world. Already this week, an index of market volatility, sometimes referred to as the “fear gauge,” spiked to the highest level since February. Investors searching for safety have piled into the relative security of government bonds, sending the yield on the 10-year German bund into negative territory for the first time.
Yellen said that the uncertainty surrounding Brexit was one of the factors that stayed the Fed's hand. She also acknowledged that broader vulnerabilities in the global economy that have buffeted the U.S. recovery since last summer still remain.
"In the current environment of sluggish global growth, low inflation and already very accommodative monetary policy in many advanced economies, investor perceptions of and appetite for risk can change abruptly," she said.
Wall Street's major indexes rose immediately after the Fed released its statement but turned negative just before the closing bell. The blue-chip Dow Jones Industrial Average and the broader Standard & Poor's 500-stock index ended the day down 0.2 percent. The tech-heavy Nasdaq alos dropped by 0.2 percent. Yields on 10-year U.S. Treasuries, which move in the opposite direction of prices, slid to 1.6 percent.
The Fed has emphasized that its timeline for raising interest rates will depend on the evolution of the economy. Just a few weeks ago, Yellen explicitly stated that the next increase could come "probably in the coming months." But after data showing surprisingly weak job growth in May, Yellen dropped the reference during a subsequent speech. On Wednesday, she said officials "need to assure ourselves that the underlying momentum in the economy has not diminished" before hiking rates again.
"I’m not comfortable to say that it’s in the next meeting or two, but it could be," Yellen said. "It’s not impossible.”
The slow return to full strength has forced the central bank to push back plans to withdraw its support. In March, officials reduced the number of expected rate hikes this year from four to two. Most of the Fed's 17 top officials maintained that position on Wednesday, but six indicated they believe the Fed should just move once more this year. Officials also lowered their expectations of how much the benchmark rate will rise over the next two years. The median estimate in 2018 fell from 3 percent to just 2.4 percent.
The Fed also downgraded its forecast for economic growth this year from 2.2 percent to 2 percent. However, its estimate of year-end inflation rose from 1.2 percent to 1.4 percent, inching closer to its target of 2 percent. Its projection for the U.S. unemployment rate was unchanged at 4.7 percent.
In its official statement, the central bank pointed to several encouraging signs in the economy. American consumers have proven remarkably resilient, with government data this week showing retail sales remained robust in May despite the slowdown in hiring. Yellen called that strength a "key factor" in the Fed's confidence that the economy will continue to grow. She also pointed to a welcome pickup in wage growth and warned against overreacting to one month of disappointing jobs data.
The Fed has been in uncharted waters since it the 2008 financial crisis plunged the American economy into the worst recession in generations. It slashed its benchmark overnight interest rate to zero and pumped trillions of dollars into the recovery in hopes of fostering faster growth.
Seven years later, it took the first step toward withdrawing that support in December when it raised its target rate by one quarter of one percent, to a range of 0 to 0.25 percent. It was an important milestone in the long road to recovery and was supposed to signal the central bank’s confidence that progress would continue. Still, Yellen cautioned Wednesday that the future remains cloudy.
"The economic outlook is inherently uncertain," she said. "Assessment of appropriate policy is also necessarily uncertain, especially at longer time horizons and will change in response to changes to the economic outlook and associated risks."