The Economy

Central Banks Move to Ease Brexit Fallout

Britain's vote to leave the EU could put a dent in the Fed's plans to raise interest rates again this year.
Matthew HellerJune 24, 2016

The U.S. Federal Reserve and other central banks moved Friday to soothe financial markets around the globe that were reeling in the wake of Britain’s vote to leave the European Union.

The Fed said in a statement that it was “carefully monitoring developments in global financial markets” and was prepared to “provide dollar liquidity through [its] existing swap lines with central banks, as necessary, to address pressures in global funding markets, which could have adverse implications for the U.S. economy.”

Elsewhere, the Bank of England offered to provide more than 250 billion pounds ($347 billion) plus “substantial” access to foreign currency to ease any squeeze in markets, while the European Central Bank said it could provide additional liquidity and would protect euro zone financial stability.

British Pound Tumbles After Brexit | Graphiq

“The bank will not hesitate to take additional measures as required as those markets adjust and the U.K. economy moves forward,” BoE governor Mark Carney said.

As Reuters reports, with memories of the 2007-09 financial crisis still fresh, central banks are concerned that market liquidity could quickly dry up, squeezing access to cash and financial instruments.

In the United States, traders of U.S.-interest rate futures reacted to the U.K.’s “Brexit” by pricing in a small chance of a Fed rate cut, and they now see little chance of any rate hike until the end of next year.

“One can forget about rate hikes in the near term,” Thomas Costerg, New York-based economist at Standard Chartered Bank, told Reuters. “What I’m worried about is that the Brexit vote could be the straw that breaks the back of the U.S. growth picture.”

A majority of Federal Open Market Committee members predicted at their meeting earlier this month that there would be two rate hikes by the end of the year. But according to the CME Group’s reading of the fed funds futures markets, investors are betting that even by February of next year, rates will be where they are today.

Torsten Slok, chief international economist with Deutsche Bank Securities, told Fortune that the Brexit will be vexing for central bank policy makers, as political risk is the most difficult kind of risk for economists to model.