In the near term, analysts do not expect the Fed’s decision to have a big impact, given that
markets were not predicting a rate rise at this meeting. However, the on hold decision
does betray some concern the Fed has for the economic outlook and the challenges that
may lie ahead for policy makers.
While the Fed is likely to start moving interest rates up in coming months, this month’s
decision does raise some questions about timing, and the data they are watching to
motivate a change. What is unchanged, is that when the Fed moves it will be a very slow
rate of increase, with the level of rates remaining low for a long time.
Yellen’s message is that “the US economy is performing well” and the Fed expects it will
continue to do so. Most members of the Fed’s decision making committee expect a rise
by the end of the year. But the criteria for a Fed hike to begin has been broadened by
the recent decision. The Fed has cited “international developments” as critical, whereas
there has been a focus on domestic factors, such as the unemployment rate, in the past.
The on hold decision is intended to allow the Fed “to have a little bit more confidence”
that the economy will be strong enough to see inflation back towards its 2% target when
they do go. If concerns about China and Emerging Markets ease we could see the Fed
commence raising rates before the end of the year. But if their concerns over the pace
of growth remain, we could see the Fed hold off for longer.
All up, analysts consider the improvements in the US economy will enable the Fed to
begin raising rates in coming months and that continued growth will support
the share market.
Previous episodes have shown that a rise in rates does not necessarily flag the
end of a bull market in shares, although some short-term weakness and
continued volatility is likely as the historic lift-off from zero interest rates gets