Federal Reserve delays raising rates from close to zero
The US Federal Reserve on Thursday delayed raising its benchmark interest rate — known as the federal funds rate — for the first time since 2006 and it remains at 0.25%, a level that was set in December 2008.
“In light of the developments that we have seen and the impacts on financial markets, we want to take a little bit more time to evaluate the likely impacts on the United States,” Janet Yellen, the Fed chair, said at a press conference following a two-day policy meeting.
According to The Wall Street Journal, the Dow Jones Industrial Average ended down 65.21 points, or 0.4%, to 16674.74. Meanwhile, the yield on two-year Treasury notes, which in part reflects market expectations of rate movements in the medium-term, posted its largest single-day decline since late December 2010.
“The central aspect of her nature on this and other jobs is not to leave any stone unturned and to be really prepared and buttoned up. Much more often than not, that will lead to no surprises,” said Alan Blinder, a Princeton University economics professor who served with Yellen at the Fed in 1994, when he was vice chairman and she was a governor. “Had the Fed raised interest rates today that would have really surprised markets for no good reason,” he added according to the Journal.
Ben May of Oxford Economics commented: “The rise in the euro against the dollar in response to the Fed’s decision to leave interest rates on hold highlights our view that quantitative easing in the Eurozone cannot guarantee a weak euro. If the Fed were to become more dovish in response to emerging market concerns, the shield that the weak euro has provided the Eurozone economy and its exporters could crumble and force the European Central Bank to either increase monthly bond purchases or signal an extension of the QE program beyond the initial planned end date of September 2016. Nonetheless, it still only seems a matter of time before the Fed starts to raise interest rates and the diverging monetary policy stance between the Fed and the ECB should prompt future renewed falls in the euro.”
Alfonso Esparza of Oanda, the online forex broker, said: “The mention of ‘monitoring developments abroad’ hints at a concern with global conditions such as the Chinese stock market selloff played a significant part in the central bank holding rates...The US dollar is losing ground across the board as the timing of the rate hike is being pushed back. The dollar was boosted by potential interest rate divergence and the more the Fed delays the first rate hike, the market will punish the dollar.”
The Financial Times said: "Projections released with the statement showed that some 13 of Fed policymakers expect a rate rise in 2015, down from 15 previously. Three others are looking for firming to occur in 2016, and one further out in 2017.
Officials’ median estimate for the federal funds rate was lowered this year to 0.375%, indicating policymakers still expect one rise this year. The estimate for 2016 was 1.375%, down from 1.625% previously, while the 2017 estimate was 2.625%, down from 2.875%."
Janet Yellen decided not to raise rates just yet, confounding the expectations of many economists and traders. So will the Federal Reserve's policy become the new norm? Cardiff Garcia talks to the FT's Gillian Tett and John Authers.