After concluding a two-day monetary policy meeting, the Fed said in a statement that the economic activity is expanding at moderate rate with labor market approaching maximum employment but inflation staying muted.
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That unknown is the global economy.
Across Europe, stock markets were declining and Germany’s DAX index led the way with a fall of almost 2%.
But the US central bank maintained its bias towards a rate hike sometime this year, while lowering its long-term outlook for the economy.
A higher Fed rate eventually would send rates up on many consumer and business loans.
Meanwhile, U.S. privately-owned housing starts in August were at a seasonally adjusted annual rate of 1,126,000, according to the commerce department on Thursday. The Fed has policy meetings in October and December. But that makes it harder for investors to assess which data to monitor and when the Fed will consider the global backdrop has improved.
Though the Fed had not been expected to raise interest rates for the first time in more than nine years, investors appeared anxious by the lack of guidance from the central bank and its concern about the global economy.
“We are surprised that economists were surprised the Fed left interest rates unchanged”, wrote Nick Raich, chief executive officer at the Earnings Scout in an email.”Based on our collection of decelerating sales trends among USA corporations, we believe the Fed made the right decision to wait”. In addition, the target inflation rate of around 2 percent has not been achieved either – which places more pressure on the Fed to hold off on the increase.
In a rare move, the Fed pointed to global risks when explaining why it had delayed what would have been the first interest rate hike in almost a decade. The mortgage banking industry, in particular, was anxious about the prospect of rate hike, as it may have had a significant impact on mortgage application and origination volumes. The price of oil fell sharply, pushing down energy stocks.
Unemployment has plummeted from a 10 percent peak to a comforting 5.1 percent.
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The median projection of the 17 policymakers showed the Fed expects the economy to grow 2.1pc this year, slightly faster than previously thought. December’s fed funds futures contract rose to drop its yield to 21.5 basis points, implying only about a 42 percent chance of a rate increase by the end of the year.
