THE FED: The Federal Reserve decided Thursday to keep interest rates at record lows for now, citing low inflation, weakness in the global economy and unsettled financial markets.
The Fed held its benchmark federal funds rate at zero to 0.25 percent Thursday, showing policy makers aren’t convinced inflation will move gradually back to their 2 percent target.
“But we want to take a little more time to evaluate the impact the global market volatility on the U.S. economy”, Yellen said.
“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term”, the Fed said.
On Wall Street, stocks were sharply lower, with the Dow Jones down almost 1% in morning trading.
But there has been mounting concern outside the US over a potential “lift-off” and negative repercussions of a rate rise – the first since 2006 – on emerging economies.
The Fed is holding the federal funds rate near zero, which is holding all interest rates down.
“We see a Fed which knows the labor market is tightening but can’t yet bring itself to overlook its (excessive) fears about the global outlook”. The Fed will make a decision during their meetings in October and December. The Standard & Poor’s 500 index fell 5.11 points, or 0.3 percent, to 1,990.20, and the Nasdaq composite index rose 4.71 points, or 0.1 percent, to 4,893.95. This led many to conclude that China’s market slide last month had raised red flags for Fed officials. It now foresees the economy expanding at just a 2.3 percent pace next year, down from June’s projection of 2.5 percent.
The dollar slumped to a three-week low against a basket of major currencies, while European shares came under pressure from the Fed’s downbeat comments on the state of the economy.
Yellen reiterated that market should pay less attention to the timing of the first interest rate increase and more attention to the expected path of rates.
He added: “No rate hike should be a reason for at least some gains in the stock market, especially if a December hike now looks less likely as well”. The one vote was from Jeffrey Lacker who recommended a quarter point raise. The two-year Treasury note, which would be more heavily impacted by higher short-term interest rates, had an even more dramatic move, dropping to 0.68 percent from 0.80 percent.