Stocks soar – and plunge – as Fed holds firm on interest rates

Mike van Dulken, head of research at Accendo Markets, said investors are feeling uneasy after the Fed highlighted “concerns about external factors such as China, market volatility and deflation derailing a [U.S.] recovery”.

“The question is whether or not there might be a risk of a more abrupt slowdown than most analysts expect”. Keeping it in place is a signal that the Fed believes the economy isn’t quite strong enough to withstand higher rates.

The U.S. Federal Reserve’s decision not to raise its key interest rate upset markets from Japan to Germany on Friday.

While most consumers enjoy low inflation – attractive borrowing rates and limited price hikes – the Fed seems to fear the potential of the D word, deflation.

“China was an influence in this meeting, whereas in the past that would have been much less important”, Hong Kong-based JPMorgan Asset Management chief Asia market strategist Tai Hui (許長泰) said.

Will the Fed raise interest rates before the Easter Bunny arrives? But the Fed kept rates at 0%. The Fed will next meet in October and then in December.

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

“The Fed’s assessment of the global economic conditions has made investors nervous as uncertainty about the timing of a United States rate hike continues”.

Of the nine members of the Federal Open Market Committee, only Richmond Federal Reserve Bank president Jeffrey Lacker voted for an increase, arguing for a 25 basis point rise.

Figures yesterday showed the economy expanded 0.4 percent in the second quarter, less than the Reserve Bank had forecast, after growth slowed to 0.2 percent in the first three months of the year.

The Dow Jones industrial average fell 185 points, or 1.1 percent, to 16,490 as of 11:18 a.m. Eastern time.

But there has been mounting concern outside the USA over a potential “lift-off” and negative repercussions of a rate rise – the first since 2006 – on emerging economies.

The new forecast has unemployment dropping to 5 percent by the end of this year, down from 5.3 percent in June.

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.