Officials at the Federal Reserve are now more likely to cut interest rates this year, not raise them, according to odds implied by financial markets in the wake of the United Kingdom’s vote to leave the European Union.
Futures indicated Monday that there is almost no chance that the central bank will raise interest rates before December, even though Fed members projected as recently as this month that they expected raising rates twice this year.
Instead, investors are saying there is a nearly 20 percent chance that the Fed would instead cut rates before December.
In that scenario, the Fed would reverse its decision this past December to raise its short-term interest rate target to 0.25 percent to 0.5 percent, and lower the target range back down to between 0 and 0.25 percent. The Fed held rates near zero between late 2008 and the end of 2015 in response to the financial crisis.
Fed chairwoman Janet Yellen said earlier this month that the mere risk of a Brexit vote was a factor in the monetary policy committee’s decision not to raise rates in June.
After the results indicated that Leave had won, the pound cratered and global markets slumped. The dollar correspondingly strengthened, a development that would, if it holds, hold down U.S. inflation. In response, the Fed would keep rates lower for longer to keep money loose and hit its inflation target.
The threat of the market turbulence turning into an outright panic would also tilt the Fed toward looser monetary policy.
Already, the Fed and other central banks have said that they’re prepared to act if necessary to stabilize markets.
Yellen canceled plans Monday to travel to Portugal in favor of returning to the U.S. as markets continued to be volatile.
