Fed holds steady on interest rates – and rattles investors
The US Federal Reserve holding down interest rates came as no surprise. Its dovish tone, however, did.
Last Thursday, the Federal Reserve, the US central bank, announced what may have been the most keenly awaited interest-rate announcement since the crisis. Following recent upheaval in the markets, investors had gone from expecting a small rise to anticipating a freeze but accompanied by a warning that rates would still be rising soon. So when the Fed maintained the Federal Funds rate at the existing 0%-0.25% level, few were surprised. What did startle markets was the "dovish" tone of the official statement and press conference that followed.
The timing of future rate rises will depend on "progress both realised and expected toward [the Fed's] objectives of maximum employment and 2% inflation". But Fed chief Janet Yellen also noted that the rising US dollar had already tightened US financial market conditions. The Fed also said it would pay attention to "the outlook abroad", a reference to the collapse of the Chinese stockmarket over the summer, and a drop in commodity prices.
Stocks wobble
Indeed, officials from both China's and Indonesia's central banks criticised the Fed for being unclear about its strategy, with a Chinese official saying that "central banks should be responsible and provide better guidance to the market". Part of the problem was the reference to external conditions. As well as its employment and inflation targets, the Fed has introduced a "quasi-third mandate" on global growth, says Jeremy Zirin, chief equity strategist at UBS Wealth Management, on Reuters.
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Fed officials are "fooling themselves into thinking that, if they only just wait a little longer, all the uncertainty will clear up and they can raise interest rates with no danger of making a mistake", said Paul Ashworth of Capital Economics. "The real world doesn't work like that... there is always considerable uncertainty." Ashworth still expects a December hike, but "it's possible" the Fed "will find another reason to wait until early 2016". But the longer the delay now, "the higher interest rates will eventually have to go".
The Fed should be more bold
The Fed's influence means it does have to "balance both domestic and global factors", says demographics expert and UBS adviser George Magnus, also in the FT. But China's economic adjustment is no short-term thing it will take years. The Fed can't keep delaying on that basis, particularly if the US continues to recover it'll only result in a "more disruptive policy adjustment" in the future. "The Fed should start telling markets about the difficult trade-offs it faces."
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Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.
He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.
Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.
As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.
Follow Matthew on Twitter: @DrMatthewPartri
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