Here’s What Brexit Means for Janet Yellen and the Federal Reserve

Turmoil in financial markets is the result of a referendum in the United Kingdom in which voters decided to leave the European Union, a decision that creates a great deal of uncertainty over what trade policy in the world’s fifth-largest economy will look like in the coming years.

What does seem certain, at least at the moment, is there won’t be any more Fed rate hikes this year. 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: between 25 and 50 basis points above zero.

In fact, traders are assigning a 4.8% probability that the Fed lowers rates when it next meets on July 26-27, an opinion that stands in stark contrast to materials released after the Fed’s meeting earlier this month, when a majority of FOMC members predicted there would be two rate hikes by the end of the year.

Torsten Slok, chief international economist with Deutsche Bank Securities, says we won’t know exactly how the Fed is digesting this information until next month’s FOMC meeting. That gathering will not produce an updated dot-plot chart showing individual FOMC members’ predictions of the future path of interest rates. But the bank’s statement should give us an idea of how it is balancing relatively strong labor market indicators—like historically low unemployment claims—with rising uncertainty over the state of the global economy.

Until that time, Slok argues that the futures market predicting no new rate increases this year is “a reasonable reaction.” We’ll just have to wait and see if the Fed catches up with market sentiment.

Fed officials not only have to worry about working to calm financial markets in the United States, but they also have to stand prepared to support markets around the globe. The dollars status as the global reserve currency means the Fed may need to provide emergency lending of dollars to foreign central banks, so that those banks can support financial institutions that need dollars to function. The Fed committed to as much in a statement Friday morning:

The Federal Reserve is carefully monitoring developments in global financial markets, in cooperation with other central banks, following the results of the U.K. referendum on membership in the European Union. The Federal Reserve is 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.

These are questions that will undoubtedly affect the Fed’s dual mandate of low inflation and full employment, but they are difficult questions for economists to answer.