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Fed Delays Rate Hike: What Does That Mean?

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Fed delays rate hike

In a two-day meeting that ended on Thursday, September 17, the Federal Open Market Committee (or FOMC) announced its decision to leave the federal funds rate unchanged at 0%–0.25%, continuing a seven-year record of interest rates at zero levels. The FOMC sets the Fed’s monetary policy.

In the wake of the global sell-off triggered by slower growth in China and accentuated by the devaluation of the yuan, the Fed’s chairwoman Janet Yellen decided to wait for more conclusive evidence before raising rates. However, she left a window open for a possibility of a rate hike in October or December.

The Federal Reserve mentioned that “uncertainty abroad” had made it riskier to tighten policy rates. It preferred to continue waiting.

The dot plots in the above graph suggest a more dovish FOMC. The dot plot shows every member’s view of interest rates. From the notes released after the meeting, we see that 13 out of 17 policymakers at the meeting expect rates to move this year.

However, this is lowered than the 15 who were of this view in June.

Yellen re-emphasized the importance of the expected path of rates rather than the timing of the first hike. The Fed said global risks arising from emerging market economies led to this decision to delay what would be the first hike in a decade.

The Fed also cut GDP (gross domestic product) growth forecasts for 2016 and 2017 and upgraded its GDP growth forecast for 2015. Unemployment estimates were also lowered from 5.3% to 5% for 2015. Federal fund rate estimates were reduced from 3.75% to 3.5%.

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Impact on stock markets

After the Fed’s announcement was made public, financial stocks collapsed. The Financial Select Sector SPDR ETF (XLF) fell 1.9% on Friday, September 18, while the SPDR S&P 500 ETF (SPY) fell 1.63%. Major banks such as Wells Fargo (WFC), J.P. Morgan (JPM), Bank of America (BAC), and Citigroup (C) reacted negatively to this announcement.

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