The next meeting of the US Federal Reserve will be 14-15 June 2016; a shade more than a week before voters in the UK decide if the UK is to remain within the EU. It has become economic orthodoxy to consider that a vote for Brexit will have a significant, negative, effect on the UK economy, but in a highly connected world such a decision would not adversely affect the British alone.
Janet Yellen, chairman of the Federal Reserve, has strongly indicated that the ripple effect of a Brexit will be considered in a US decision to raise interest rates. Given recent disappointing economic indicators in the US, it has to be probable that any decision on increasing rates will be deferred to next month’s meeting when the UK’s fate within the EU will have been decided.
Ms Yellen noted: “If incoming data are consistent with labour market conditions strengthening and inflation making progress toward our 2% objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate. I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones. As a result, I expect the economic expansion to continue, with the labour market improving further and GDP growing moderately”.
On Brexit, Ms Yellen suggested that a decision to leave the EU could adversely affect “risk appetite” and market sentiment in the US (and, presumably, further afield). Delaying a US rate hike until next month (at the earliest) would provide further indication about the health of the US economy and allow the Fed to fator in the impact of the UK decision whether it be for the status quo or a leap into the economic dark.