The decision by the US Federal Reserve not to raise interest rates has increased worldwide market concerns about the health of the global economy.
Even after the first increase off of zero, Fed interest rate policy will be “highly accommodative for quite some time“, Yellen stressed.
In the end, however, they were left with a muddled picture marked by low United States unemployment and steady economic growth, but no sign inflation has begun to rise towards the 2pc target. Still, Yellen says a rate hike is likely this year; they’ll meet again in October and December. The World Bank has warned developing economies to prepare for more capital and currency market turmoil while the OECD urged the Fed to move slowly and make its policy plans clear, whatever it decides.
A majority of Fed officials still believe the central bank will raise rates before year-end, but the central bank showed a bit less conviction on that point. She had called on the Fed to hold fire until early 2016, saying the economy would be better off as a result.
“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 Federal Open Market Committee said in a statement in Washington.
“The Fed has consistently projected rates as moving higher than what the market does”, said Scott Minerd, who oversees US$240 billion as global chief investment officer at New York-based Guggenheim Partners LLC.
China’s surprise devaluation of the yuan in mid-August raised concerns about further slowdown in the world’s second-largest economy and was a factor behind the recent correction in USA stocks.
Interest rates could rise soon, as the Fed has two more planned policy meetings this year in which the rate could be increased. “The Fed has introduced a quasi third mandate about the global growth, apart from the labor market and inflation”.
EUROPE SLUMPS: Germany’s DAX was down 3 percent while the CAC-40 in France fell 2.9 percent. The country’s main stock index, the Nikkei 225, slipped almost 2 percent to 18,070.21, as traders fretted about the potential impact on Japanese exports stemming from the yen’s appreciation.
Commodity prices were also relatively well-supported with US crude futures CLc1 last trading at $46.83 per barrel, down slightly from Thursday’s high of $47.71 CLc1 but still up nearly 5 percent on the week. A higher Fed rate would eventually send rates up on many consumer and business loans.