Over the next month the market’s “fixation is going to shift” away from Fed lift-off talk, he says, and toward figuring out how the US and global economy is doing and what the outlook is for third-quarter corporate earnings.
After months of speculation, the Federal Reserve announced Thursday it would not raise interest rates, citing a stable economy but one that needs to show improvements. At the end of the session, the Fed resolved that interest rates will remain unchanged.
The stock market surged after the decision with the Dow rising over 150 points, but then it fell back to flat as it appeared to sink in to investors that a rate increase is likely coming.
Of the 17 Fed officials at the meeting, 13 indicated they expect a rate hike by the end of this year, majority pointing to a 0.25-0.50 percent range.
That was underscored by a downward turn in the United States consumer price index on Wednesday, confounding Fed hopes of seeing a pickup in inflation.
“I can’t give you a recipe for exactly what we’re looking to see”, she said.
The World Bank has warned developing economies to prepare for more capital and currency market turmoil while the OECD urged the Fed to move slowly and make its policy plans clear, whatever it decides. And low oil prices and a high-priced dollar have kept inflation undesirably low.
The Fed’s decision to leave rates near zero “was a close call in my mind, in part reflecting the conflicting signals we’re getting”, he said.
Given the U.S. dollar’s role as a universal currency, the Fed’s rate hike will have a wide spillover effect.
While markets had given low odds to a rate rise, about half of Wall Street’s economists and strategists were expecting a hike in the cost of borrowing.
The decision came even as the FOMC stressed the USA economy is on course and it increased its forecast for growth this year to 2.1 percent. The nation has had seven years of 0% interest, despite the fact that, in the words of the Fed, “economic activity is expanding at a moderate pace”.
Inflation has been running below 2 percent for more than three years.
The EUR/USD, GBP/USD and December Comex Gold markets traded as if investors believe the Fed missed its best opportunity to raise interest rates.
For emerging markets, especially in Africa, a hike in interest rates could be grave. She also said most Fed members saw a rate rise before year-end, as reflected in the “dot plot” chart.