Fed Expected to Hold Rates Steady as Brexit Vote Clouds Outlook

File picture shows U.S. Federal Reserve Chairman Yellen holding a news conference to announce raised interest rates in Washington
U.S. Federal Reserve Chairman Janet Yellen holds a news conference to announce raised interest rates in Washington, in this file photo taken December 16, 2015. REUTERS/Jonathan Ernst/FilesREUTERS

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By Reuters

The Federal Reserve is expected to keep interest rates unchanged on Wednesday and signal if it still plans to raise rates twice in 2016 amid concerns about a U.S. hiring slowdown and Britain's possible exit from the European Union.

The Fed raised its key overnight lending rate in December for the first time in nearly a decade, but it has backed away from further monetary policy tightening this year largely due to a global economic slowdown and financial market volatility.

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As policymakers resumed a two-day meeting Wednesday morning and were due to issue a policy statement at 2 p.m., U.S. stock futures rose in anticipation the central bank would keep rates at their historically low levels. The statement will also come with updated economic projections and Fed Chair Janet Yellen will hold a news conference a half hour later.

The Fed's targeted overnight lending rate is forecast to remain in the current range of 0.25 percent to 0.50 percent, according to a Reuters poll of 151 economists.

Fed forecasts in March pointed to two rate rises in 2016, but a sharp slowdown in U.S. job gains in May and the prospect that Britain could vote next week to leave the EU have added to doubts about the economic outlook.

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With U.S. hiring expected to bounce back in June and no financial meltdown from the Brexit vote currently seen, economists in the Reuters poll now expect the Fed to tighten monetary policy in July or September.

Yellen, however, recently warned that a British exit from the EU could have a significant economic impact, a concern shared by other Fed policymakers.

"We shouldn't expect the Fed to be prepared to send a clear signal about a timing of rate hikes," said Roberto Perli, an economist at Cornerstone Macro.

The Fed telegraphed December's rate increase by saying in October it would consider tightening at its next meeting. While such clarity appears unlikely on Wednesday, policymakers could provide guidance through their updated economic forecasts.