US stock markets closed down almost 2% on Friday following sharp falls across the world due to investors’ renewed concern about the health of the global economy after the US Federal Reserve decided to leave interest rates on hold.
The Dow Jones Industrial Average closed down 291.7 points (1.75%) to 16,383 points. The S&P 500 lost 32.09 points (1.6%) to 1,958.11, and the Nasdaq fell 66.72 points (1.36%) to 4,827.23 points.
The Fed’s decision to leave US borrowing costs at 0-0.25% was in part a response to a market meltdown in August, but it received a cool reception from investors unsettled by the delay in tightening policy.
Markets fell across most of the world, starting with a 2% fall in Tokyo’s Nikkei index; the Dax in Germany lost 3%, France’s CAC index closed down 2.5%, and the FTSE 100 lost 1.3%.
Expectations of an interest rate increase from the Fed this week had diminished following the China-induced turmoil in markets in August, but investors had been braced for a signal from Washington that a move was likely soon. Instead, the Fed’s chair, Janet Yellen, combined unchanged policy with a soft statement on Thursday that highlighted anxiety about the global economy.
“The longer investors had to ruminate on Thursday’s Fed statement the worse they seemed to take it, with the European indices widening their losses as the day went on,” said Conner Campbell of spreadbetting firm SpreadEX. “An export-hurting rise in the euro-dollar was the main culprit.” The euro gained a cent against the dollar to $1.143.
Wall Street now believes the earliest date for a US rate rise is December, with many investors expecting a further delay into 2016.
Paul Ashworth, US analyst at consultancy Capital Economics, said: “The more the Fed procrastinates, the more we get the feeling that officials are fooling themselves into thinking that if they only just wait a little longer, all the uncertainty will clear up and they can raise interest rates with no danger of making a mistake.
“Unfortunately, the real world doesn’t work like that. We now expect the Fed to delay the first rate hike until December, but it’s possible that it will find another reason to wait until early 2016. Beyond that, however, the longer the Fed delays now, the higher interest rates will eventually have to go. Inflation is coming.”
Bill Strazzullo, chief strategist at market research firm Bell Curve Trading, said: “If growth in the strongest economy the United States isn’t strong enough to raise rates even a quarter of point, what does that say about the prospects for global growth?”
The Fed’s prevarication is seen as having a bearing on UK interest rates, since it is thought unlikely that the Bank of England will want to move first.
“The Federal Reserve surprised market participants by combining a decision to leave interest rates unchanged with a dovish commentary and outlook,” explained Guy Dunham of Baring Asset Management in London.
“Prior to the Fed decision, markets were looking positive but they now find themselves under pressure with global growth concerns weighing on sentiment,” added Lukman Otunuga, a research analyst at currency broker FXTM.
The US has been the best performing of the world’s major economies since the financial crash of 2007-09, but inflation remains well below the Fed’s target while wage growth has been muted despite a fall in unemployment to its pre-recession levels.
Even so, Wall Street believed the Fed was on the point of announcing the first increase in rates since 2006 as the first step in returning monetary policy to a more normal setting.
Yellen, however, cited volatility triggered by the slowing Chinese economy as a reason for caution.
“The outlook abroad appears to have become less certain,” the Fed chairman said at a press conference announcing the decision. “In light of the heightened uncertainty abroad … the committee judged it appropriate to wait.”
Speculation that weaker global economic activity will affect demand for oil led to a 2% drop in the cost of crude, with Brent crude changing hands at $48 a barrel. Money also flowed into German government debt, a classic safe haven, driving down the yield on bunds. Risk aversion pushed the gold price up, meaning shares in gold producers bucked the trend on Friday.
Marc Ostwald, of ADM Investor Services, accused Yellen of “injecting further unwanted uncertainty” into the markets.
“If the [Federal Open Market Committee] objective was to convey confusion, it has succeeded, thereby ploughing a deep furrow of instability and destabilisation, and shining a very bright light on the large debt and liquidity trap it and other G7 central banks have spent seven years crafting,” he said.
However, Anne Richards, chief investment officer at Aberdeen Asset Management, said the Fed made the right call.
“Right now, there is not a compelling reason to raise interest rates in the US,” she told Bloomberg TV.
This article was written by Rupert Neate in New York and Larry Elliott in London, for theguardian.com on Friday 18th September 2015 21.22 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010