Fed’s decision impacts on global economies

Following the conclusion of a closely watched meeting, the Federal Reserve is keeping interest rates at record lows, citing a weak global economy, low inflation and instability in financial markets, APA reports quoting Reuters.

The Federal Open Market Committee said in its statement that it “anticipates” it will be time to raise rates “when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term”. In what amounted to a tactical retreat, Fed Chair Janet Yellen said in a press conference that developments in a tightly linked global economy had in effect forced the USA central bank’s hand.

An economic environment in which the Fed feels it cannot end the era of near-zero interest rates is not one likely to foster the kind of earnings growth needed to support stocks at their current, above-average valuations. The Standard & Poor’s 500 index fell 5.11 points, or
0.3 percent, to 1,990.20, and the Nasdaq composite index rose 4.71 points, or
0.1 percent, to 4,893.95. There have been recent economic indicators that show a strengthening American labor market, however, inflation is below the 2 percent mark the Fed would like to see.

Major USA stock indexes closed mixed.

But a rate raise would make many things more expensive for consumers, from monthly credit card bills on carried debt to higher mortgage rates for some.

“Most participants continue to think that economic conditions will call for an increase in the federal funds rate by the end of this year“, Yellen said.

After the Fed stood pat on rates Thursday -but also suggested that it’s still aiming for a hike later this year-gold futures GCZ5, +1.81% rallied in the overnight trading session and extended strong gains into Friday.

Money-market derivatives indicate the fed funds effective rate will average 0.56 per cent in a year, 1.10 per cent in two years and 1.54 per cent in three years.

Interest rates have been near zero since 2008, when the Fed drastically cut rates in response to the financial crisis and Great Recession.

Oil finished slightly lower after the Fed’s comments.

Fed officials also pointed out that the rate hikes, once they began, would be extremely gradual. “The timing of the first rate hike is of secondary importance compared to the pace of increase”. “Yellen noted that October was still a “live” meeting, but she did seem to downplay the probability of a rate hike by saying it was only a “possibility”. “A short squeeze across the precious complex prior to the FOMC (Federal open market committee) caught the market off guard”, he said.