At a scheduled press conference after the decision, the Fed’s chair Janet Yellen noted the fact that the U.S. job market has improved and inflation is still below the central bank’s target but warned that the outlook overseas had become more unstable of late.
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China affects the world more than ever before, and its influence over global markets will only increase as it approaches the United States economy in size.
“In light of the heightened uncertainty overseas … the committee judged it appropriate to wait”, Yellen said.
The World Bank’s chief economist recently warned that the Fed risks triggering “panic and turmoil” in emerging markets and should hold fire until the global economy is on a more solid footing. The move came amid the lowest unemployment rate in seven years of 5.1 percent last month and strong consumer spending.
Signs of a disinflationary trend reasserting itself are in stark contrast with a fairly healthy economy and a rapidly tightening labour market, and highlight the dilemma Fed officials face as they contemplate raising interest rates for the first time in almost a decade.
Falling inflation makes it harder for central banks to raise rates.
“The market got what it wanted”, said Alan Rechtschaffen, a portfolio manager at UBS. The Fed has policy meetings in October and December.
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. Prices for US Treasuries rose.
Following the Fed’s decision on Thursday, the dollar slumped to a three-week low against a basket of major currencies, supporting gold prices. So just why did the Federal Reserve decide to leave rates untouched? The dollar was on the defensive, having fallen more than 1 percent after the Fed’s decision, while USA bond yields plunged, erasing their sharp rises in the past couple of days. However, its forecasts for GDP growth in 2016 and 2017 were downgraded. They now expect the unemployment rate to hit 4.8 per cent next year, remaining at that level for as long as three years.
Wall Street signaled its distress a day after the Fed opted not to hike interest rates, voicing concern over slowing growth in China.
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Fed officials like board member Jerome Powell and Atlanta Fed President Dennis Lockhart in recent months had publicly endorsed a September rate hike, forming a near majority along with longstanding inflation hawks like Richmond Fed President Jeffrey Lacker.
