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. They noted that it was likely that there would only be “gradual increases” in U.S. interest rates, and pointed out that the future direction of interest rates would depend on what happened in the economy.
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In currency markets, the Japanese yen was 0.1 per cent weaker at Y118.84 per dollar as data showed a lack of growth in retail sales in December. Soon after the Fed disclosed its statement, the dollar weakened against the majority of its peers.
In the statement, the federal open markets committee (FOMC) said that it is “closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook”.
“We view the words “reasonably confident” and “global” as meaningless word changes and still expect the gradual pace of hikes this year to win out”. Some economists have said they now expect just two slight rate increases during 2016.
The Federal Reserve signaled renewed worry about financial market turbulence and slow overseas economic growth but didn’t rule out raising short-term interest rates in March.
Uncertainty over the future path of USA interest rates weighed on European stocks on Thursday, while the dollar edged a touch lower against the euro.
“It was very noncommittal”, Asha Bangalore, economist at Northern Trust, said of the Fed’s statement.
Confidence that inflation would move up to the central bank’s 2% target was a central condition the Fed set out for more rate hikes.
“While the Fed may still feel some of these factors are transitory, they can not look past this tightening of financial conditions”, said Jim Caron, fixed income portfolio manager at Morgan Stanley Investment Management.
The policymakers left the target for their benchmark rate unchanged at 0.25% to 0.5%. Traders are wagering that, at the earliest, the Fed may raise rates from 0.50 to 0.75 during the March Federal Open Market Commitee (FOMC) meeting. So no rate hike was expected this month. Much of the optimism stems from solid job growth, with US employers adding an average of 284,000 jobs a month in the final quarter of a year ago. That would put the rate at about 1.4% by the end of 2016.
Since the Fed raised rates december 16, stocks have plunged, oil prices have skidded and China’s leaders have struggled to manage a slowdown in the world’s second-biggest economy.
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The prospect of rising interest rates in the USA also has unsettled investors, causing many analysts to predict the Fed might delay the next increase until spring or later.
