Has the Fed become the World Bank as global fears leave rates unchanged?

Well now we know, the Federal Reserve acted as the World Bank, the IMF and most fund mangers hoped and left rates unchanged. The rational for the decision was concentrated on global economic concerns and the lack of inflationary pressures. The US dollar and treasury yields fell post the announcement.  Expectations are now that interest rates in the US will remain where they are for the rest of the year at least. The Federal Reserve only has two meetings left this year to move on rates. As global economic conditions are unlikely to change greatly in the coming months, investors see the rational for keeping rates where they are is unlikely to change in the short term.

 

Equity prices initially fell on the news, and then recovered before finishing marginally lower. The Vix fell below 20 at one stage, and then rose to close slightly lower but remaining above 20. Asian markets finished the day slightly stronger on the news of the Fed’s decision.

 

What are the conclusions from Thursday’s lack of action? The US economy is expected to grow between 2.5 and 3% this year, inflation minimal and interest rates to remain close to zero. This should provide US companies a reasonable environment to grow earnings, if only modestly. Investors who have been looking for yield will continue to find it in the equity market, so keeping rates close to zero should ensure equities continue to attract capital. Emerging markets that has seen sentiment come very negative on interest rate rise fears, may see some capital return.

 

We say that equity markets don’t like uncertainty. Today’s action feels as if the uncertainty for this year as far as US interest rates has been removed. Investor’s minds will now turn to the October q3 earnings season. Should company earnings repeat the first half trend and meet or possibly exceed expectations that should help underpin equity prices. Until that time equity and bond markets may well mark time. 

Equities in Europe are looking to open this morning fractionally lower from where they closed ahead of the decision. 

Posted on September 18, 2015 .