World stock markets wavered Thursday after the Federal Reserve sounded a note of caution on the world economy and its effect on US growth but left the door open for rate hikes.
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The Fed did repeat that it expects rates to increase at a gradual pace. Until the December FOMC meeting there had not been an increase in the Fed’s interest rate since June 2006, before the beginning of the American financial crisis.
But the policymakers of the Federal Open Market Committee said they still expected that inflation, weakened in the short term by the oil price crash, would push toward the 2% goal in the medium term.
The Fed will base any future rate hikes on economic conditions.
“The Fed basically said that we are paying attention to markets and global developments, but we stick to our game plan” of interest-rate increases, Gene Tannuzzo, senior fixed-income portfolio manager at Columbia Threadneedle Investments, which had United States dollars 471 billion assets under management at the end of September, was quoted as saying.
The Federal Reserve, at the close of its two-day policy meeting yesterday, kept interest rates unchanged and said it was “closely monitoring” global economic and financial developments but maintained an otherwise upbeat view of the USA economy.
“Any reading of this statement implies very strongly that they are at least reassessing economic conditions”, Jim Russell, principal & portfolio manager at Bahl & Gaynor, told CBS MoneyWatch.
The jobless rate remained at 5% in December, down from a 2009 peak of 10%, while payroll growth continued, according to government surveys of households and employers.
“In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal”, said the statement.
The US economy slowed late a year ago. The Dow Jones industrial average shed more than 7% of its value in the first three trading weeks of 2016.
As well, the economy’s growth, as measured by the gross domestic product, has lagged, with many analysts suggesting that it slowed to a sluggish annual rate below 1% in the October-December quarter. That was a prospect that unsettled investors used to years of easy credit fueling a boom in stock markets. So, some now see the falling stock prices as the correction that they had forecast would occur after the Fed started raising rates.
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The fall in oil prices and uncertainty over China’s economic slowdown remain major concerns across financial markets. In declining to say whether risks to the outlook had shifted in light of market and overseas developments, officials made clear that they are struggling to assess a shifting landscape.
