In 2013, when former Fed Chair Ben Bernanke signaled that the bank would eventually end its stimulus program, emerging markets had a “taper tantrum”.
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Economists say higher rates would tend to slow growth and make it less likely that inflation will rise sharply and harm the economy. Since then, the economy has almost fully recovered even as pressures from overseas appear to have grown.
The Fed made it clear that worries about the global economy had influenced its decision to keep rates on hold.
“For the markets, it means more months of uncertainty, which investors do not like”, said Craig Erlam, senior market analyst at OANDA. The worldwide Monetary Fund expects the Chinese economy to grow just 6.8 percent this year, the slowest since 1990.
The Dow Jones industrial average ended the day down 65 points, or 0.39 percent, to 16,674.74, erasing a jump of 193 points.
Interest rates have been near zero since 2008, when the Fed drastically cut rates in response to the financial crisis and Great Recession. She has stressed that any rate increases will likely be modest and gradual.
Nevertheless, 13 of the 17 Fed officials at the meeting indicated they expect a rate hike by the end of this year, majority pointing to a 0.25-0.50 percent range.
The chairwoman also remarked that the committee “judged it appropriate to wait for more evidence, including some further improvement in the labor market, to bolster its confidence that inflation will rise to 2 percent in the medium term”.
Both he and Boston College economics professor Robert Murphy said they anticipate a December rate hike, since the Fed “doesn’t want to surprise the markets”, Yaylaci said, “especially in the midst of current financial volatility”. In June, 15 Fed officials had predicted that the first rate hike would occur this year.
All of that has kept inflation extremely low. “China is a concern, and oil prices look set to take another leg lower“. There have been recent economic indicators that show a strengthening American labor market, however, inflation is below the 2 percent mark the Fed would like to see. The 2-year yield was the standout, plunging 11%, or 0.089 percentage point, to 0.722%.
According to the Fed statement released after the policy meeting, the Federal Open Market Committee (FOMC) will assess both realized and expected progress toward its objective of maximum employment and 2 percent inflation in its consideration of when to raise the benchmark interest rate. Some fear the economy might suffer.
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Yet some analysts like Charles Ortel, the Managing Director of Newport Value Partners, feel the Fed needs to get on with what it’s been threatening, in an attempt to help balance the books.
