US FED RATE DECISION - WAITING GAME CONTINUES

By Research Desk
about 2 years ago

 

By Ruma Dubey

Oh no! tThat’s the first reaction.

The US Federal Reserve did not, once again, change the rates, as expected, given the global turmoil, especially China. We are back to waiting now, for another FOMC meet with realms of paper and reels of film wasted on whether or not the rates will be hiked. So now, we once again wait for 28th Oct when the next FOMC meet is scheduled. Most of the emerging markets were more or less prepared for this eventuality and markets had probably discounted a 0.25% rate hike. The immediate reaction of the markets tomorrow would be a rise and soon, it could start looking for another trigger, which would be the RBI meet.

At the Press Conference, the first question as expected was about the timing of the rate hike, whether it could happen in 2015? And Yellen kept the suspense going, saying that in the Committee, 13 out of the 17 are looking for a move in 2015. Thus it is still looking at the first rate hike in 2015, which could mean either in October or later in December.

The crux of today’s decision can be summed up in one sentence from the issued Press Release , “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.” China alone has seriously unnerved the Fed.

Actually the statement was so similar like all the previous ones, there seemed to have been little change to the language or even the wordings as its economic outlook remains unchanged, so does future policy guidance. The only change in that context is concern about ongoing global turmoil and its effect on global growth and financial markets.

A few highlights of the Fed statement:

  • To support continued progress toward maximum employment and price stability, the Committee reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.
  • In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation.
  • The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
  • The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Thus based on this statement, clearly the Fed once again gave no indication of the timeline and the rest of the world will thus continue to wait. At the same time, in the ensuing Press Conference, Janet Yellen advised the world to not make too much out of the first rate hike and said that even when rates are hiked, the monetary policy will likely remain highly accommodative for quite some time after the initial increase in the federal funds rate.

For us in India, if we are to take cues from the FOMC meet of today, clearly the RBI might also prefer to wait it out, not because the Fed did not make a decision or because of China but rains have played truant. Our RBI decision would be based on purely domestic factors only with global factors getting a passing reference.

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