Fed keeps key interest rate unchanged

Since the Federal Reserve increased rates in December by 0.25 percent for the first time in a decade, stocks have slid. The Fed is not holding a news briefing after the meeting, nor is it releasing new economic or interest rate forecasts until March.

The ongoing volatility in financial markets across the globe, affecting Wall Street performance in stocks and high yield, has generated prominent risks to the pace of USA economic expansion, meaning the odds of the Federal Reserve raising interest rates anytime soon are now much lower than December’s expectations.

In December the FOMC’s forecast implied four quarter-point rate increases through this year to end with the benchmark federal funds rate around1. Some economists say they now expect just two slight Fed rate increases during 2016.

“They don’t want to tip their hand one way or another because they don’t know”, says Michael Gapen, chief USA economist of Barclays and a former Fed staffer. “Europe hasn’t solved its problems, we have geopolitical risks in the Middle East and in the United States there is a lack of confidence in the political parties and the candidates”. Even after a gain of 211 points Friday, the Dow Jones industrial average shed more than 7 percent of its value in the first three trading weeks of 2016. During the press conference following that meeting, Fed Chair Janet Yellen “sounded overly concerned about global growth, and especially China, and those concerns spooked markets”, Canally said.

Crude oil prices sank 1 percent to $31 a barrel in New York Wednesday, pulling big energy companies lower. A handful of Fed officials have averred that the central bank will stay the course and move forward with its intended rate hikes.

Falling oil prices and concern about slowing growth in China have caused major stock indexes to tumble since the start of the year.

But this month, at any rate, “the Fed is nearly certain to not make any changes to key interest rates”, PNC bank’s William Stone said in a note to clients. Still, some economists suggest that if the Fed could have foreseen what has ensued in the month since it raised rates, it might have reconsidered. Since the start of the year, global equity markets have tanked and investors’ mood has soured. “The rather inept handling by Chinese authorities of the stock market troubles in that country has really bothered global markets”. Yet they don’t see a recession as imminent.

Lacker said he expects the economy to keep growing at around 2.2% this year, as it has since the end of the recession, and to keep adding jobs.

The consultancy is forecasting 2.5 percent US growth for this year, just above the Fed’s base forecast of 2.4 percent.

The Fed and investors still have a fundamental disconnect on how fast rates are likely to rise. “They probably recognize that if they change their posture every time there is a whiff of bad news, they will not be credible”, Robert Z. Aliber, professor emeritus of global economics and finance at the University of Chicago’s Booth School of Business, told Anadolu Agency on Monday. Futures were implying roughly two more rate hikes this year, lesser than the Fed’s own projections. But some other analysts think the Fed could stick with the four rate increases that officials had signaled could be coming this year. But falling inflation assumptions, coupled with the market turbulence, could lead them to signal deepening concern over the US and world economic outlooks.