The Federal Reserve left interest rates unchanged last night, sending markets on a roller coaster ride as investors struggled to understand the economic factors behind the dovish decision.
Trading was turbulent after the Fed announced its decision to hold rates, with the three major US indices first hitting session highs, and briefly turning negative before reversing course and turning positive again, only to close in the red.
The Dow and the S&P closed down 0.4 per cent and 0.3 per cent, respectively, while the Nasdaq finished slightly higher, up 0.1 per cent.
“There’s a little bit of relief obviously that it’s not happening today, but there are questions and head-scratching as to when it will happen,” said George Rusnak, co-head of global fixed income for Wells Fargo Investment Institute.
In a rare move, the Fed pointed to global risks when explaining why it had delayed what would have been the first rate hike in nearly a decade, leading many to conclude that China’s market slide last month had raised red flags for Fed officials.
“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 in its policy statement after a two-day FOMC meeting. It added the risks to the US economy remained nearly balanced, but that it was “monitoring developments abroad”.
In a press conference yesterday, Fed chair Janet Yellen seemed to dial down concerns over China, telling reporters that a slowdown in the country’s economy had long been expected and “there are no surprises there”.
“Developments we saw in financial markets in August partly reflected concerns of downside risk to Chinese economic performance and the deftness with which policymakers are addressing those concerns,” Yellen said, adding that the Fed was assessing, not responding to, market movements.
“The Fed should not be responding to up and downs in the markets. It certainly is not our policy to do so,” she said.
Markit chief economist Chris Williamson said that the Fed’s decision will be “seen by many as appropriate” given China’s slowdown and recent market volatility.
But he warned that the Fed’s dovishness may lead to more, rather than less, instability in the future, saying that the “lack of action leaves lingering uncertainty about the outlook for US policymaking, which will no doubt fuel further volatility in the markets”.