The Federal Reserve declined to raise interest rates from their record low of near-zero on Thursday, citing concerns that the still fragile world economy may “restrain economic activity” and further drag down already low inflation.
While some economists had expected a rate rise – the first since 2006 – recent stock market turmoil in China and fears that a slowdown in the world’s second largest economy could dampen the global economy appear to have put off the decision for now.
Janet Yellen, the Fed chair, said the central bank had maintained the federal funds rate at 0-0.25% – where it has been since the 2008 financial crisis – because of “heightened concerns” about a sharp slowdown in China and lower-than-desired inflation.
She said the US recovery from “the great recession” meant that there was an argument to be made for increasing rates – and the bank’s poliycmakers had that argument today – but in the end they still needed more evidence that there was a sustained global recovery.
“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the Fed said in a statement, following a two-day meeting of policymakers.
The Fed said that while the US economy is almost balanced, it could be knocked of course by global developments and the central bank was closely “monitoring developments abroad”.
For months, economists had been expecting a rate rise (dubbed “liftoff” by Fed officials) at this meeting, but their enthusiasm has waned markedly following last month’s global stock market panic over the health of the Chinese economy.
The Fed repeated that there needs to be “some further improvement in the labor market” and to be “reasonably confident” that inflation will increase before it can go ahead with an interest rate hike.
Inflation is running well below their 2% objective and “recent global economic and financial developments may restrain economic activity somewhat”.
The Fed’s preferred measure of inflation was up just 1.2% in the latest reading and has been below 2% for more than three years.
The Fed’s decision was not unanimous – as it normally is – with Jeffrey Lacker, president of the Fed’s Atlanta regional bank, casting a vote for an increase. Lacker had pushed for the Fed to begin raising rates by moving the federal funds rate up by a quarter-point.
Rates are still expected to be raised this year, with 13 of the 17-member committee predicting that the Federal Open Markets Committee (FOMC) will raise rates by at least 0.25 percentage points. However, four policymakers believe that rates should not be raised until at least 2016, including one who pushed out until 2017. In June only two members felt the rate hike should be left unchanged until 2016.
While Yellen is not due to hold another press conference until December she said “every meeting is a live meeting”, and that a rate increase was possible in October when the FOMC next meets. If the Fed decides to raise short-term rates at that point, it would call a press briefing, she said.
Dan Greenhaus, chief strategist at BTIG, said: “Clearly the Fed was worried about developments abroad and that was, at first blush, the primary reason why rates were not raised this month. This view is corroborated further by another addition later in the paragraph. After repeating that risks are nearly balanced, the Fed then said ‘but is monitoring developments abroad’. Clearly global developments are front and center.”
The median projection of the 17 policymakers showed the Fed expects the economy to grow 2.1% this year, slightly faster than previously thought. However, its forecasts for GDP growth in 2016 and 2017 were downgraded.
An increase in rates will eventually lead to an increase in mortgage, car and personal loan and credit card rates in the US, and spark central banks throughout the rest of the developed world to also consider raising their interest rates.
The Fed forecast that unemployment will drop to 5% by the end of this year, down from 5.3% in June. The unemployment rate in August dropped to a seven-year low of 5.1%.
There was little reaction to the Fed’s decision on Wall Street with the Dow Jones Industrial Average trading up 0.2% at 16,775 – roughly where it had been before the announcement. However, bond investors seemed cheered by the Fed’s decision to keep rates ultra-low. The yield on the 10-year Treasury note fell to 2.23% from 2.30%. Bond prices tend to rise and yields tend to fall when investors expect subdued inflation, low rates and modest economic growth.
Paul Ashworth, chief US economist at Capital Economics, said: “We now expect the fed funds rate to end this year at between 0.25-0.50%. But it is not implausible that some other ‘risk’ will emerge over the next few months (the debt ceiling is the most obvious candidate) that will convince the Fed to delay even longer. We now expect the fed funds rate to end next year at 2% rather than 2.38%. Nevertheless, we still anticipate that rising wage and price inflation next year will eventually force the Fed to tighten policy much more aggressively. The labour market is already close to full employment, it’s only a matter of time. The longer the Fed delays now the higher interest rates will eventually have to go.”
This article was written by Rupert Neate in New York, for theguardian.com on Thursday 17th September 2015 20.24 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010