Low Inflation Keeps Fed’s Rates Unchanged

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Unstable financial markets, generally weak global economy, and stubbornly low inflation were cited as the main reasons that the Federal Reserve left the interest rates unchanged after its two day meeting, despite many expecting that they would finally be raised this time.

Rate Increase Still Likely

Despite Thursday’s decision, an interest rate hike is still expected before the end of the year. There are still two meetings of the Fed before then, in October and in December. The majority of the institution’s officials on the committee which sets the federal funds rate forecast are convinced that rates will increase during one of them, unless there are further major changes in the economy.

China Fears

The sharp economic slowdown in China and emerging markets were key talking points during the deliberation. The main point was the effect globally if the U.S. raised rates now, before the situation had stabilized further. While a lot of analysts have been expecting for Chinese economy to slow for some time now as the country re-balances its economy, shaking the tree further, when not absolutely necessary was deemed unwise.

Low Rate Advantages

While everybody agrees that a rise in rates is imminent, the continuation of the extremely low rate policy most likely means unchanged low rates on mortgages and car loans. This in return could help keep the economy on its current steady path of growth. The delay should also help increase home sales and construction, which could then in turn aid in the creation of new jobs, particularly in the construction industry and also increase consumer spending.

Markets Reaction

The wait for the decision had caused earlier volatility as traders moved to position themselves based on their expectation of the decision. As the time ticked down to the announcement, the markets went almost eerily quiet.

Most markets ended lower, with the Dow Jones industrial average slipping 0.4 percent, or 65 points. Stocks initially rose after the Fed’s decision was made public, but fell back after the market fully digested the news. Unsurprisingly, the most active market after the announcement was bonds which rallied in price pushing yields even lower.

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