Fed keeps rates unchanged; will monitor global pressures

Investors are now focused on the Fed’s March meeting, where the markets are pricing in a 29% chance of a rate liftoff, compared to 36% before the January statement was released. Though the central bank commented on the volatility seen throughout the markets in recent weeks, saying it’s “closely monitoring global economic and financial developments”. The Fed raised rates for the first time in almost a decade last month.

Since the Fed raised rates December 16, stock markets have plunged, oil prices have skidded and China’s leaders have struggled to manage a slowdown in the world’s second-biggest economy.

Annual economic growth is expected to have slowed to 1.9 per cent, from 2.1 per cent, an outcome that could push expectations for a hike in interest rates even further out.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.

A more aggressive path of rate increases would boost US short-term rates, which would likely help the dollar against lower-yielding currencies such as the yen or euro.

Investors had a muted response after the Federal Reserve said it will maintain the current interest rates and are monitoring global growth concerns after the contentious start to the new year.

With a lot of uncertainty and anxiety swirling around the globe, the next meeting of the Fed’s policymaking Federal Open Market Committee promises to be interesting.

Just last week, the International Monetary Fund revised downward its outlook for global growth, forecasting lower rates of growth in both the US and Europe. “If the market stabilizes, the Fed will hike”, said Joseph LaVorgna, chief USA economist at Deutsche Bank.

The attendant fall in the value of the Greenback sent the GBP USD exchange rate down to 1.4091 on 21st January; this represented the lowest trading rate for Cable since the first half of 2009.

Coming a week after the European Central Bank gave a strong signal that it was ready to ease policy further in the coming months to combat deflation, the FOMC made no suggestion of policy actions after a two-day meeting.

The tumbling markets so far haven’t shaken consumer confidence. The increase ended an unprecedented seven-year stretch of keeping the rate near zero to try to boost the economy.

“Overall, a March rate hike is still possible, but it will require signs of improvement in the incoming economic data and financial markets that may not show up quickly enough”, economist Paul Ashworth of Capital Economics wrote in a note to clients. In its statement, the Fed noted that “net exports have been soft and inventory investment slowed”. Home and auto sales have also been solid.

In recent months, policymakers have homed in on the twin trends of a strengthening dollar and falling oil prices, which have depressed core inflation measures to well below the Fed’s 2 percent target.