Fed Rate-Boost Bets Shift Into 2016, Money Markets Signal

The U.S. Federal Reserve on Thursday kept its benchmark interest rate unchanged, saying the rising uncertainty overseas and low inflation were the key reasons behind the decision. “China is a concern, and oil prices look set to take another leg lower“.

In an updated economic forecast, 13 of the 17 Fed policymakers said they see the first rate hike occurring this year.

Interest rates have been near zero since 2008 in response to the financial crisis and Great Recession.

In a rare move, the Fed pointed to global risks when explaining why it had delayed what would have been the first interest rate hike in almost a decade.

“In light of the heightened uncertainty overseas … the committee judged it appropriate to wait”, Yellen said.

“We’ve seen significant outflows of capital from those countries, pressures on their exchange rates and concerns about their performance going forward”.

The Federal Open Market Committee, the monetary policy decision body, will hold two policy meetings this year, in October and December. “But volatility is likely to remain high as markets, like the Fed, will still have to confirm the USA economy is withstanding the adverse impact from the global economy“, said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management.

The big fear on Wall Street was a Fed rate hike.

At a scheduled press conference after the decision, the Fed’s chair Janet Yellen noted the fact that the USA job market has improved and inflation is still below the central bank’s target but warned that the outlook overseas had become more unstable of late.

Adds Lee: “The new (Fed) reaction function – one that assigns greater importance to global and worldwide financial market developments – will require some time to assess and understand”.

Inflation, as measured by the Fed’s preferred gauge, was 0.3pc in the 12 months through to July and has lingered below 2pc for more than three years.

Now in its seventh year of expansion, the US economy is growing at a mere 2.2 percent annual rate.

Ms Yellen said she still believed the fundamental mechanics of an economy will eventually kick in and lead to more inflation, but the central bank seemed as uncertain as ever as to when that might happen.

The vote on the policy statement was a sign of how China’s economic slowdown and market slide left Fed officials unnerved about the state of the world economy.