The fact that the Fed has gone this long without raising short-term rates at least one more time is a slap in the face of savers, who’ve been suffering through more than a decade of lower-than-average rates.
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Stock prices initially extended their gains after the Fed announcement but then lost some ground.
“What’s nice here is that the Fed didn’t hike interest rates, yet they still have confidence in the economy”, said Gregori Volokhine of Meeschaert Capital Markets. Real GDP growth was marked-to-market with respect to 2016 but unchanged in 2017-2018, while the unemployment rate and the inflation forecasts were nearly unchanged.
The decision was widely expected and marked a significant concession from a Fed that in December had forecast four quarter-point rate increases in 2016.
The dollar fell against all its major peers, extending a slide toward its biggest annual decline in seven years, after the Federal Reserve delayed raising interest rates again, saying more time was needed to assess USA economic conditions.
In that environment, fewer rate increases would be needed.
On balance the Fed’s message did not go as far as some in currency markets had expected towards outright promising a rise in borrowing costs by the end of the year.
The FOMC kept interest rates unchanged at 0.25-0.5 percent as widely expected but the policy board laid down the groundwork for an increase in the coming months.
The Federal Open Market Committee (FOMC) announced on Wednesday that the federal funds target range will remain at 0.25 to 0.50 percent for at least the next six weeks, ending weeks of speculation.
The yen eased against the dollar and the euro a day after the Bank of Japan left rates unchanged but introduced a new policy to manage the gap between short and long-maturity government bonds and pledged to overshoot its 2% inflation target.
The Fed chair noted that historically low rates haven’t caused the economy to overheat as some analysts feared they would.
The U.S. Federal Reserve is still enabling financial markets.
“We found the economy has a bit more running room”, she said.
US economic growth was disappointing in the first half of the year.
“It’s also important that we make sure we get back to 2 percent [inflation]”, she continued.
Maybe that remains the case, but central banks around the world are facing questions about the continued effectiveness of loose policy given that in many markets interest rates are already ultra-low or in negative territory.
Fed committee members meet again in November and December, with the markets expecting at least one rate hike before 2017. What was unusual this time was that the result drew dissenting votes from three members – the most dissents in almost two years. Futures prices indicate the chance of a rate hike by December climbed to 61 per cent, from 52 per cent a week earlier.
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The policy statement borrowed from a speech given by Ms. Yellen at the Kansas City Fed’s conference in Jackson Hole, Wyo., in August, when she said the case for a rate increase had strengthened.
