The US Federal Reserve (FED) has decided to leave interest rates near zero in light of recent economic data, low inflation and uncertainty surrounding the global economic outlook.
The market has proved to be right as it factored in a 70% chance that the FED will leave interest rates on hold, even though earlier this year many analysts believed that September will be the most likely time for the first interest rate hike since December 2008. The federal funds rate will remain at 0.25% for the time being.
FED chair Janet Yellen cited low inflation and recent economic uncertainty in China and other emerging markets as the main reason to remain patient with monetary policy. She emphasised that the US economy is in good shape and that the unemployment rate has gradually moved lower. The Federal Open Market Committee (FOMC) has lowered its projections for the interest rate over the upcoming three years slightly in light of recent data.
The statement of the FOMC said: “Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft.”
Commenting on the outlook and whether the FED will raise interest rates later this year, the statement said: “In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation.” The FOMC is waiting for further improvements in the labor market and will raise the funds rate as soon as it is “reasonably confident” that inflation will move towards its 2% target. Going forward the most important factors will be the pace at which economic conditions improve. The gradual increase will be steeper if economic activity picks up more aggressively.
Over the medium-term the FED expects a lower than normal interest rates and therefore ensures that monetary policy will remain highly accommodative. The statement said: “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”
Currencies experienced heavy volatility following the statement. The AUD jumped above the 72.5 cent mark shortly after the release of the statement but erased all of the gains immediately. As of 10am (AEST) the AUD/USD exchange rate was hovering around 71.9 US cents.
Author: Simon Herrmann
Sep 18, 2015
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.