Fed keeps interest rates unchanged

Fed keeps interest rates unchanged photo Fed keeps interest rates unchanged

US stocks are lower in midday trading as investors fret about the outlook for global growth after the Federal Reserve chose to hold off raising interest rates.

The reaction probably reflected the signal that a rate increase was still likely to occur later this year or investors were spooked by lift in global growth concerns by the Fed.

Prominent institutions such as the worldwide Monetary Fund and the World Bank, as well as influential economists such as former Treasury secretary Lawrence H. Summers and Nobel-winning economist Joseph Stiglitz, have argued against a rate increase. “October, it remains a possibility”.

The Fed has left rates unchanged at almost zero since the 2008 financial crisis. But many economists say the Fed is paying particular attention to three key gauges in weighing whether to raise rates. It will reinforce expectations that the RBNZ will cut official interest rates further.

“We’re in the same situation we were in before, which is uncertainty about when are they going to move”, said John Bonnell, a senior portfolio manager at USAA Investments in San Antonio, Texas. And low oil prices and a high-priced dollar have kept inflation undesirably low.

Following the announcement, Yellen told a news conference: “A lot of our focus has been on risks around China, but not just China, emerging markets more generally and how they may spill over to the United States”. This suggests that the Fed is attaching importance to risk overseas more than ever.

Only 3 members expect policy tightening will be delayed till next year.

Over a longer period, though, Fed rate hikes would spread through the economy and make it costlier to borrow. More homebuilding, in particular, can help drive growth by creating construction jobs and boosting sales of furniture, appliances, electronic goods, and landscaping services. But the prospect of a rate rise in September began to dim as China’s devaluation of its currency, the yuan, and a steep fall in crude oil prices roiled stock markets.

The Dow Jones industrial average ended down 290.16 points, or 1.7 percent, to 16,384.58. It had rallied shortly after the Fed’s statement came out, then drifted lower.

Investors around the world have been closely watching the USA central bank’s decision on short-term rates, which have been near zero since the financial crisis.

This, in turn, would have forced other central banks to hike rates – at the same time as trying to foster growth – in a bid to support their currencies and prevent a flight of capital. She has stressed that any rate increases will likely be modest and gradual.

But in a 9 to 1 vote the Fed officials decided the economy is not quite strong enough to handle a rise, as Janet Yellen explained.

Instead, the Fed retained language it has been using that it will be appropriate to raise interest rates when it sees “some further improvement in the labor market” and is “reasonably confident” that inflation will move back to the Fed’s optimal inflation target of 2 percent. There are only two more meetings this year for Federal Reserve policymakers, in October and December.

Fresh economic projections showed 13 of 17 Fed policymakers foresee raising rates at least once in 2015, down from 15 at the last meeting in June. In determining how long to maintain this target range, the Committee will assess progress-both realized and expected-toward its objectives of maximum employment and two percent inflation, it said. The euro rose 0.1 percent to $1.1297 and the dollar rose 0.3 percent to $120.89 yen.

On Friday, the broad-based USA index, the S&P 500, finished down 1.61 percent as traders weighed the Fed’s action.

The dollar’s surge, like rising interest rates, makes it harder for emerging nations and businesses to pay off their debt. Investors had feared a USA rate hike would have drawn investment funds from emerging economies for higher returns in the United States.

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