In face of higher uncertainty, the Fed opts for caution

The Brexit will have consequences and nobody knows to what extent it will impact the global economy, including the United States’. This is the main observation Cyceon noted after reading the latest FOMC whose meeting was held one week before the Brexit vote. “It would be prudent to wait for the outcome of the upcoming referendum in the United Kingdom on membership in the European Union (EU) in order to assess the consequences of the vote for global financial market conditions and the US economic outlook,” the minutes read.

Indeed, everyone agrees that the Brexit will generate financial market turbulence. A prolonged period of uncertainty therefore hinders any significant move by the Fed for some time. As analysts now assess at just 12% the chances of a rate hike by the end of 2016, they also point out that the globally good US macroeconomics, the fast pace in the expansion of the US service sector and the absence of overheating as a result show the Fed is right to wait and see what happens next.

In addition to the Brexit, China’s monetary policy and the looming threat of another sovereign debt crisis in the eurozone on growing fears about Italian banks add to growing uncertainty. The US economy is likely the most capable to overcome financial turmoil, however the decision by 6 UK property funds to halt redemptions reminds how the subprime crisis started in 2007.