The statement by the Federal Reserve and its decision to leave rates unchanged reaffirmed concerns about global economic growth. Wall Street was looking closely at the wording in the post-meeting statement for indications of the future course, but the statement only repeated language that increases will be “gradual”. “Household spending and business fixed investment have been increasing at moderate rates in recent months, and the housing sector has improved further; however, net exports have been soft and inventory investment slowed”.
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Global stocks, however, have had their worst start to any year, dropping 8 percent, spooked by the slowing of China’s economy and perhaps by a delayed response to the end of near-zero interest rates in the U.S. In an indication the Fed was taking global risks seriously, a prior reference to the risks to the economic outlook being “balanced” was removed from its statement.
The Fed’s latest statement, issued after a two-day meeting, included no specific timetable for rate increases.
Still, the changes the Fed made in describing economic conditions signaled that it might be prepared to slow its credit tightening until it sees more evidence that the markets and the economy are stabilizing.
“The Fed has the luxury of waiting to see what happens”, economists at Cornerstone Macro wrote in a note to clients last week, saying the central bank’s challenge will be to balance financial market concerns with “the encouraging news on both the employment and inflation fronts”. That description was dropped today.
The Fed’s decision was approved by a unanimous vote of 10-0.
In late USA trading, the Dow Jones industrial average was down 216.06 points, or 1.34 percent, to 15,951.17, the S&P 500 was down 21.92 points, or 1.15 percent, to 1,881.71 and the Nasdaq Composite was down 96.95 points, or 2.12 percent, to 4,470.72.
Members of the policymaking Federal Open Market Committee were somewhat less optimistic about the state of the US economy than they were last month.
“Inflation is expected to remain low in the near term”, the FOMC said.
Oil prices did make some gains on Wednesday, however, with Brent crude reversing earlier falls to $32.40 a barrel, while United States oil was up to $31.69. Still, they foresee a rebound to a rate of around 2 percent in the current January-March quarter. “There were some irrational expectations that (Chair) Janet Yellen was going to apologise for the December rate increase and promise never to raise rates ever again in anyone’s lifetime”.
Stocks ended under heavy selling pressure after the Fed left rates unchanged, as expected, in its statement on monetary policy.
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The Fed raised rates by a quarter point on Dec 16 in a sign the economy had largely recovered from the 2007-2009 financial crisis and recession and was shrugging off weakness in China, Japan and Europe.
