Federal Reserve holds rate at zero, cites China worries

“We may continue to see a downward progression for stock markets, as investors adjust to a world where growth is expected to be weaker…”

Over the next month the market’s “fixation is going to shift” away from Fed lift-off talk, Koesterich says, and toward figuring out how the US and global economy are doing and what the outlook is for third-quarter corporate earnings.

US stocks declined Friday, with energy hardest hit as the price of oil dropped for a second day, as investors interpreted the Federal Reserve’s decision to hold rates at record lows as a negative take on the economy. “The situation abroad bears close watching”, Fed chair Janet Yellen said, suggesting overseas factors have played a large part in the interruption in the Fed’s rate policy. And low oil prices and a high-priced dollar have kept inflation undesirably low.

“The Fed’s reluctance to raise interest rates weighed on the USA dollar and in turn supported precious metals”, said Carsten Menke, a commodities analyst at Julius Baer.

Nevertheless, 13 of the 17 Fed officials at the meeting indicated they expect a rate hike by the end of this year, majority pointing to a 0.25-0.50 percent range.

To be sure, there was no particular urgency about a rate hike, notwithstanding the expectations the Fed had repeatedly fueled. The Fed’s key rate has been near zero since the depths of the recession in late 2008.

But emerging markets rose in relief because an interest rate hike would have drawn investment funds from their countries to seek higher returns in the United States.

But Fed policymakers’ forecast indicates they still expect to bump up the federal funds rate this year for the first time in almost a decade, with meetings scheduled for October and December.

“Heightened concerns about growth in China and other emerging market economies have led to notable volatility in financial markets”, Yellen said.

The core personal consumption expenditure (PCE) price index, an inflation gauge preferred by the Fed, only went up 1.2 percent year on year in July, far below the central bank’s 2 percent.

On real GDP, the following forecast changed were made: Median GDP now 2.1% for 2015, up from 1.9% seen in June….

Yet the Fed’s influence on many consumer and business rates is only indirect.

“We are looking at, as I emphasized, a USA economy that has been performing well and impressing us by the pace at which it is creating jobs, and the strength of domestic demand”, Yellen said.