Brexit Vote Likely to Put Fed Interest Rate Hikes on Hold

Jun 24 2016 | 4:57pm ET

Britain’s shock decision to leave the European Union will have far-reaching consequences for the global economy, but in the short term a major consequence is an almost certain delay in the pace of monetary policy normalization in the United States. 

Even before the referendum’s results were official, traders had already pushed the implied probability of the Fed’s next major hike into next year. Given the fragile state of the economy, which was cited as a reason to temper the pace of rate increases in the Fed’s most recent minutes, the Brexit vote will only give the Fed greater reason to pause – especially since the true economic impacts of Britain’s decision won’t be truly calculable for years. 

Some immediate impacts are already being felt by the Fed, including meeting a global demand for dollars as investors worldwide piled into U.S. Treasury bonds overnight and into Friday. Central banks have pledged to provide liquidity as needed, but given the dollar’s role and the safe-haven status of dollar-based assets, it may need to work overtime to avoid a run on the U.S. currency.

In the meantime, several economists have noted the potential reduction in U.S. growth that could come from the turmoil, a potential recession in the U.K. and further slowing in Europe. Bank of America Merrill Lynch economist Ethan Harris, for instance, said in a research report they have shaved 20 basis points off their real GDP growth forecast over the next six quarters, and expect the economic drag from the Brexit to “show up as early as next quarter.” 

BofAML now expects 2016 U.S. GDP to come in at 1.8%, and they believe 2017 will be 1.8% as well.

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