“The committee continues to see the risks to the outlook for economic activity and the labor market as almost balanced but is monitoring developments overseas “, the FOMC says in the statement. “It will likely be next year before we can dissipate significantly the uncertainties stemming from China and the related slowdown in emerging market economies”. And low oil prices and a high-priced dollar have kept inflation undesirably low.
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Slowing economic growth in China, the world’s second- biggest economy, has rippled across the globe.
The dovish comments may have added to the confusion in the marketplace because now investors have to decide if the language in the statement means the Fed is still on track to raise rates in October, December or not at all in 2015.
In a separate speech, James Bullard, the president of the St. Louis Fed, complained about the Fed’s decision to hold rates steady, saying he had not supported it at the meeting. The Fed “made the decision appropriately by monitoring various situations”, said Japanese Chief Cabinet Secretary Yoshihide Suga during a news conference.
The Fed announced Thursday that they would leave interest rates unchanged in September, ending months of speculation but leaving open the possibility to raise them later this year.
“The bottom line from the meeting was a more definitive shift to a December baseline for liftoff – where we have assumed Chair Yellen was already – but few signals of a lengthier delay at this point“, Zach Pandi, an economist with Goldman Sachs, wrote on Friday.
He was the lone dissenter among the 10 Fed officials who voted at the meeting.
Another possible explanation for the stock selloff today: investors were split on what the Fed was going to do.
The new forecast significantly lowered the expectation for inflation this year to show the Fed’s preferred inflation gauge rising just 0.4 percent, down from a 0.7 percent forecast in June. Bonds rose and the price of oil fell, pushing down energy stocks. 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. She said that the unemployment rate is expected to fall further and inflation should creep closer to the 2% target next year and in 2017 after the temporary drag from a stronger dollar dissipates.
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Bullard in 2010 wrote a paper entitled “Seven Faces of the Peril”, which called on the central bank to avert deflation by purchasing Treasury notes. Some fear the economy might suffer.
