The world has been waiting for the US Federal Reserve’s rate decision in this September 16-17 Federal Open Market Committee (FOMC) meeting. There have been various expectations regarding Fed’s first rate hike since 2008.
Some believed that the Fed would postpone its rate hike due to the slowdown in the Chinese economy, while others thought the central bank would raise interest rates as the US economy moves back on track.
The Fed kept interest rates unchanged citing concerns about a slowdown in the world economy, but left open the possibility of a modest policy tightening later this year. "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.
In its decision to signal a rate hike, the Fed reiterated that it wanted to see "some further improvement in the labor market," and be "reasonably confident" that inflation will increase.
At the press conference after announcing the central bank's decision, Federal Reserve Chair Janet Yellen said recent developments in the financial markets and the global economy led the Fed to act caustiously. Yellen added that the Fed will watch both economic and financial developments when deciding the first rate hike. She reminded that the central bank will remain accomodative for some time after the first increase.
When asked about the inflation being way too below the 2 percent target, Yellen said that much of this is related to the decline in oil prices and strong dollar, while she said these will be transitory.
The last time the Fed raised its interest rates was in June 2006 and since 2008, the central bank’s interest rate has been at a low of 0.0 to 0.25 percent.
According to new economic projections, 13 of 17 Fed policymakers expect to see higher rates at least once in 2015, down from 15 at the last meeting in June, while four policymakers think rate hike should be postponed until at least 2016. The Fed will have FOMC meetings in October 27-28 and December 15-16.
A rate hike is expected to destabilise global markets, raise the dollar and pressure emerging market currencies. The International Monetary Fund (IMF) warned the Fed against the negative impacts of a hike and called the central bank to delay a rate hike.
According to many analysts, the Fed’s monetary tightening process has already been priced in by global markets. But still, a rate hike is expected to accelerate capital outflows from emerging markets.