The fears were strong enough for the Fed to leave its benchmark interest rate at 0%, where it’s been since the depths of the financial crisis in 2008.
In its accompanying policy statement, the Fed revealed worries that “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near-term”. Still, the central bank noted its concerns about weakness in global economies and markets.
“Second, they have revised down their growth and inflation expectations, a signal that they are concerned that all is not well with the USA economy either”. There are no surprises there. Specifically, Yellen acknowledged that the Fed “focused particularly” on the slowdown in China and its spillover effects such as lower oil prices and trouble for various emerging markets.
Twelve of the 17 primary dealers polled said they expect the Fed to raise rates in December. The dollar scaled a high of 94.84 intraday and a low of 94.06.
The committee’s decision comes after months of speculation on the part of analysts and the media that a rate hike was imminent and would likely be announced in September.
The decision was not surprising, and Wall Street held onto modest gains, the S&P 500 up 0.33 percent in afternoon trade.
“The market is doubting whether or not the Fed is going to hike rates in December”, said Marc Bushallow, director of fixed income at Manning & Napier in Rochester, New York.
“The bigger issue here was the worldwide situation – the idea that there was a global slowdown”. That could help maintain steady economic growth and hiring in coming months.
Major markets fell 1 percent after the open, with the Dow losing more than 250 points.
However, the tech-heavy Nasdaq was up 4 points at 4,893.
On Friday, the dollar remained under pressure, with the euro up 0.3 percent at $1.1445.
In the United Kingdom, the reaction from business groups was mixed.
“Because the Fed has made clear that it intends to raise rates by year-end, the markets will eventually start bidding the dollar higher and we could see gold’s up move to be relatively short-lived”, he said. “It lacks the bold and necessary steps which must be taken to normalise monetary policy”. Many African countries have yet to recover from the crash of the Chinese stock market and an increase in the Fed reserve rate will do greater harm.
Yellen said that October is a “live meeting” that could produce a rate hike, but most Fed watchers think she will want a chance to soothe investors if there is a market tantrum. “But at the end of the day, it’s all about the data”, she said.