The US Federal Reserve’s decision to leave its zero interest-rate policy unchanged has given emerging economies, including China, some breathing room, but the Fed must stay cautious of the havoc a future rate hike could cause. The U.S. Fed previously hinted it would end its near-decade-old expansionary policy and normalize short-term interest rates within the year, but stock market volatility and concerning signs of a fast-landing by the Chinese economy have stoked voices calling for a delay in the Fed’s tightening cycle. “Without an interest rate hike, there is a good chance that we could slide back in a recession locally and nationally”. However, its forecasts for GDP growth in 2016 and 2017 were downgraded.
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“One thing appears certain, any certainty that the Fed decision would help remove the uncertainty around a possible rate rise has proved to be somewhat misplaced”, said Michael Hewson, chief market analyst at CMC Markets. On Friday, the dollar steadied against the euro after falling in the wake of the decision the euro was down 0.2 percent at $1.1418.
The talk on the street is now for a rate hike from the Fed in December. The fund rates are now between 0 and 2.5%, the same as it has been since December 2008. The world’s second-largest economy is set to grow at its slowest pace in a quarter century this year, even after five central bank interest rate cuts and fiscal stimulus.
The Fed “was satisfied with the US economy, noting moderate growth in household spending and business fixed investment, along with further developments in housing markets”, said Ozlem Yaylaci, USA economist at IHS Global Insight in Lexington.
After years on an easy-money stance, the prospect of a Fed rate hike has added to turmoil in global markets. “The economy has been performing well, and we expect it to continue to do so”, Yellen said at the start of her press conference. A year later the median of all the officials’ forecasts rises to 2.6 percent, down from the June projection of 2.9 percent.
However, Fed officials are grappling with an inflation rate that remains too low, rising just 0.3 percent for the 12 months ended July, according to the personal consumption expenditures pe index, the Fed’s preferred measure.
China is spooking the almighty US central bank – and investors.
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“When is the Fed going to move rates?” former New York Fed executive vice president Dino Kos asked on CNBC Friday.
