Federal Reserve policy makers left open the door to raising interest rates in June by nodding to improvement in global financial markets and downplaying recent weakness in the U.S. economy.

The Federal Open Market Committee omitted previous language that “global economic and financial developments continue to pose risks,” instead saying officials will “closely monitor” the world situation, according to a statement released Wednesday following a two-day meeting in Washington. The Fed left its benchmark interest rate unchanged.

“Their removal of the line on risks is pretty significant,” said Carl Tannenbaum, chief economist at Northern Trust Corp. in Chicago and a former Fed official. “That might reflect increased comfort on the committee that global influences appear more manageable.”

The yield on 10-year U.S. Treasury bonds dropped by about 0.06 percentage point while U.S. stocks fluctuated with the dollar. Fed Chair Janet Yellen wasn’t scheduled to hold a post-meeting press conference.

The Fed’s assessment of how economic conditions have evolved since the committee last met in March was mixed. Officials acknowledged recent weaknesses while adding dashes of optimism over what’s ahead for the labor market and consumer spending.

“Labor market conditions have improved further even as growth in economic activity appears to have slowed,” the FOMC said. “Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high.”

The committee reiterated that it will probably raise rates at a “gradual” pace. The central bank’s next meeting is June 14-15.

Extending a hold since raising interest rates in December from close to zero, the committee said that inflation has continued to run below the Fed’s 2 percent target, and market-based measures of inflation compensation remain low.

David Fuller's view

The US Federal Reserve has as Dual Mandate: stable prices and maximum employment.  They will not mention countries by name but reading between the lines we can assume that they are less concerned about China and commodity producers, and not without some justification.  In other words, negative deflation is slightly less of a risk and they do not yet see the ‘whites of the eyes’ of inflation.  Meanwhile, the trend of US employment is generally favourable, even though we can quibble about the quality of jobs on offer.   

Consequently, the Fed is on course for a quarter-point rate hike in June, provided there are no shocks between now and their next meeting on June 14-15.  However, there will still be a wild card which they have not had to consider previously.

US GDP and corporate profits are hardly reassuring.  Therefore the Fed in conjunction with the US Treasury will want to prevent the Dollar Index from rising.   They currently have the upper hand in this challenge, having successfully defended against the efforts of speculators to force a breakout above the psychological 100 level. 

As for the wild card, the Fed’s next meeting is a few days before the UK’s Brexit vote on 23^rd June.  The Fed cannot expect all international influences to be benign, but Brexit would be destabilising and obviously not just for the UK.  It could be one crisis too many for the accident prone EU.  The Fed may have to rely on unreliable polls and hope that President Obama’s not particularly popular words while in the UK will boost the Remain camp.

Meanwhile, the Fed will not be reassured if Wall Street rolls over beneath its range highs.  The Nasdaq 100 Index has weakened recently and will need a good rally from 4400 if it is to offset or at least delay the obvious top formation characteristics of this ranging pattern since 2015.