Stock markets mostly fell Friday, particularly in Europe, as investors were left in limbo following the Federal Reserve’s decision to keep US interest rates unchanged at a record low.
In what amounted to a tactical retreat, Fed Chair Janet Yellen said developments in a tightly linked global economy had in effect forced the US central bank’s hand.
Analysts said the Fed officials were concerned about the unrealised target of 2-percent inflation, and they may wait until the next year to raise interest rates.
Federal Reserve policymakers have slightly lowered their projections for growth and inflation in the next two years, an outlook that likely factored into their decision to hold off on raising interest rates. The Standard & Poor’s 500 dropped 16 points, or 0.8 percent, to 1,973 and the Nasdaq composite declined 30 points, or 0.6 percent, to 4,863. The Fed’s forecast still foresees inflation accelerating to a 1.7 percent increase next year, still below its 2 percent target.
“When U.S. interest rates rise, capital flows could reverse, weakening emerging market currencies and making dollar-denominated debts harder to service”.
In recent months Fed officials like board member Jerome Powell and Atlanta Fed President Dennis Lockhart had publicly endorsed a September rate hike, forming a near majority along with longstanding inflation hawks like Lacker.
Yellen said that as the labor market heals, there will be further upward pressure on inflation. The committee has two remaining meetings this year – in October and December.
The Fed’s downgrades to its forecasts for growth and inflation weren’t large. The calculation is based on the assumption that the effective fed funds rate will average 0.375 per cent after the first increase, near the mid-point of the range.
“The prudent risk management approach would argue for them to hold off, but if the Fed was really data dependent there is a very a strong case to raise rates on Thursday”, economist Ryan Sweet told Reuters.
The UK Stock Market fell ahead of the Fed’s decision and the US Stock Market opened lower too.
In Asia, Japan’s Nikkei shed 2%.
After years on an easy-money stance, the prospect of a Fed rate hike has added to turmoil in global markets.
“In light of the developments that we have seen and the impacts on financial markets, we want to take a little bit more time to evaluate the likely impacts on the United States”, Yellen said. The metal gained 1,3 percent on Wednesday in its biggest daily jump since August 20.