If the Fed had opted for a rate hike, it would have been a vote of confidence – practical as well as symbolic – for the USA economy. And if you believe that some components of the inflation picture are just temporarily lower, such as oil, a hike would make some sense.
Markets also took encouragement from Monday’s 1.9% gain in Chinese stocks, Richard Grace, chief currency and rates strategist at Commonwealth Bank of Australia in Sydney, wrote in a note.
While Fed Chair Janet Yellen has said the central bank is likely to raise rates in 2015 if the economy expands as expected, she said last week that policy makers needed more time to assess the impact of the slowdown in China and other emerging economies on us growth and inflation. And while most were expecting this from the Fed, the decision still was disappointing to some investors who believe that the USA economy can handle a rate hike now. The Bank of Japan, which is also still engaging in quantitative easing, has been more cautious about the possibility of expanding its current program, providing some support to the yen.
The concern is that countries that are dependent on foreign financing could be hit by sudden outflows of global capital, or that currency depreciation following the Fed hike could raise debt-servicing costs for countries and businesses.
Stocks were crushed Friday, with the Dow Jones industrial average (.DJI) losing almost 300 points, after the Federal held off on hiking interest rates at the end of its September meeting on Thursday.
The Japanese yen inched up against the USA dollar as the waning global equity markets spurred investors’ demand for safe-haven assets.
At 09h00 GMT, the rand had reversed some losses, edging 0.3 percent firmer to 13.4280 per dollar, inching away from the 13.4950 1-week trough it touched overnight in New York.
“Inflation’s going to return to target and our policies are a long ways out of position compared to where we should be”, he said in an interview.
With the Bank of England not moving on interest rates till at least next year, the pound will continue to trade on events from the United States and the Eurozone and their varying monetary policies in the near term.
The paper suggests that policymakers should look elsewhere for inflation outlook data to inform their rate decisions.