D-Day: Fed Decides to Keep Interest Rates on Hold

The twelve-member Federal Open Market Committee keeps rates at zero amidst concerns over global economic conditions.

In a long-awaited statement, the U.S. Federal Reserve, America’s central bank, made an announcement today on whether it would raise borrowing costs for the first time since the financial crisis began.

In the end, the Fed decided to keep interest rates at zero, citing concerns over global economic conditions and financial developments that may slow the economy and depress inflation.

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Recent global developments will put further downward pressure on inflation in the near term.

The twelve-member Federal Open Market Committee (FOMC), said: “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.”

One can only infer that concerns about the slowing Chinese, European and Latin American economies unnerved the Fed, leading it to conclude that now is not the right time to start the return to normal.

Indeed, in a press statement following the announcement, Fed Governor, Janet Yellen, indicated that while low inflation isn’t permanent, “recent global developments will put further downward pressure on inflation in the near term,” which she said could “restrain U.S. activity somewhat.”

Markets Remain Calm

In the lead up to the decision, markets remained calm relative to the jitters that were felt in recent weeks. Indeed, by midday in New York, the S&P 500 equity index was up 0.1 percent at 1,997 while the CBOE Vix volatility index was up 1.7 percent at 21.7, still above its long-term average of 20 — indicating elevated stress on Wall Street — but well down from levels seen over the past few weeks.

Although, U.S. Treasury yields dropped ahead of announcement, only to rally shortly afterwards.

Movement was muted in equity and currency markets following the announcement. The S&P 500 rose 7 points, or 0.4%, to 2,003, with seven of its 10 main sectors trading higher. The dollar was down. The GBPUSD rate shot higher in the wake of the decision, while the euro jumped 1% to $1.1408.

The overall steadiness in the market may reflect the fact that many had adjusted their expectations in the past few weeks as concerns about the global economy mounted.

Going Forward

The delay by the Fed to raise rates may lead to further nervousness and speculation. Indeed, Tomas Hult, Professor of International Business, Michigan State University, recently reported in The Conversation that the effect of uncertainty and speculation may be far worse than an actual change in rates.

He asserts that U.S., as well as Chinese and Indian, companies are ready for a rate hike because the impact on them will be negligible.

“Companies have borrowed heavily in recent years, allowing them to lock in record-low rates and causing their balance sheets to bulge. This year, corporate bond sales are on pace to have a third-straight record year, and currently tally about $1 trillion. Most of that’s fixed, so even if rates go up, their borrowing costs won’t change all that much for some time.”

However, Chris Williamson, Chief Economist at Markit, writes that today’s decision is “merely a temporary forestalling of the inevitable.” Decidely, much of the noise following the announcement indicated that most Fed officials still want to raise interest rates by the end of the year.

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