18th September 2015
Global markets are breathing a sigh of relief after the Fed decided against a rise in US interest rates.
Members of the Federal Reserve voted to hold US interest rates at zero to 0.25%, the level rates have been at since December 2008.
The strength of the global economy has had an impact on the decision, particularly the stockmarket turmoil in China.
The nine-member committee said in a statement: ‘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.’
Janet Yellen, Fed chairwoman, said it had ‘long expected to see some slowing in Chinese growth over time as they rebalance their economy’ but the ‘question is whether or not there will a risk of a more abrupt slowdown than most analysts expect’.
Nick Doxon, investment director at Aegon UK, said the decision by the Fed only delays the first upward increase in interest rates.
‘Global markets will breathe a sigh of relief, however it merely delays the first upward move,’ he said.
‘The Fed looks increasingly likely to blink first in the transatlantic race for interest rate lift off and will move in the next few months, while no-flation in Britain delays the Bank of England’s first move until the first half of 2016.’
Stephanie Sutton, investment director of US equities at Fidelity, predicted the first Fed rise would come in December.
‘After much speculation, the Fed has decided to hold back from raising rates at this point,’ she said.
‘However, normalisation appears increasingly imminent, with a first rate rise now likely in December. It is probably warranted with the US economy expanding and unemployment levels now in close proximity to the theoretical ‘natural rate’. A move towards interest rat normalisation would begin to exert greater pressure on companies to employ capital discipline and an increasingly discriminating investment approach.’
Leila Butt, senior economist at Prudential Portfolio Management Group, agreed that a US rate rise would be seen this year.
‘The Fed gas deferred rate hikes to better assess downside risks to the US economy. We maintain our view that the Fed will raise rates in 2015, as the labour market is tight and inflation is being held back by temporary factors,’ she said.
‘Pushing the first rate hike further out raises the risk of the Fed having to tighten subsequently more aggressively, which could be disruptive for both the US and global economy – beginning the rate hiking cycle earlier would allow for a more gradual path of rate rises.’