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Federal Reserve keeps interests rates unchanged, what does that mean for you?
Interview with Senior Analyst Ravi Lockyer, by Adam King.
The Federal Reserve left Fed Funds unchanged in the range of 0%-0.25%, a rate first set in December 2008.
Last night’s meeting (17th September 2015) was subject to lots of speculation in the build up with many commentators suggesting a change of direction from the Fed for the first time since the end of the global financial crisis.
Did it live up to the hype? I couldn’t answer this, so I found someone who could. Our Senior Analyst, Ravi Lockyer has been following these events closely and offers his views on how this could impact the markets, which sectors it could affect and how you as a private investor could be affected.
So Ravi, was this decision a surprise?
It was a surprise to me I must say. I did think given the strength of the economic data, that the Fed would have to move on rates. The Fed has repeatedly said that the rate move would be “data dependent”.
How will it affect the market?
The 6 month bond yield fell 46% to 0.13% from 0.24% whilst the 2 year note fell 0.14% to 0.67%. This implies the bond market has now dialed back on rate expectations, with no move expected in October or December Fed Meetings. It also suggests the bond market was surprised too. US bond prices, all along the yield curve were sharply higher post this decision.
US equities on the other hand ended lower on concerns over the reasoning behind the decision. Like the Chinese devaluation, the real issue is the reasoning and timing behind the move. Clearly the Fed is closely monitoring international developments. A number of countries have taken a turn for the worse recently. The Fed is worried about the impact of these shoes dropping on the USA. It may only be 2016 that recent events come home to roost.
What about the UK markets specifically?
This will revive concerns over China and The Far East, Brazil, Russia and other emerging markets. It will hurt UK companies with significant emerging markets and SE Asia and China exposure.
Furthermore it appears that given global growth is slowing down again, what can be done to counter it? There is no further monetary stimulus that can now be applied.
A stronger EU economy would be positive for the UK and there have been encouraging signs from Spain and Germany in 2015.
Which specific sectors could this affect?
Banks were looking forward to a rate hike so there is some disappointment there.
Transport and utilities stocks which are rate sensitive should be positive.
Was this a lot of fuss over nothing?
No in my view this was a critical and controversial decision given the very strong US data (GDP 3.7%), strong dollar, rapidly falling unemployment (5.1%-0.2%). There is also a risk of loss of credibility as a number of Fed Board Governors had said 2015 would see a rate rise. Now this appears very much in doubt. In this decision the Fed has “shown its hand”.
Is there an element of pandering to the markets here?
Yes certainly, recent market volatility appears to have played an important role. The Federal Reserve did not want to rattle the cage notwithstanding the fact the bond market had priced in a rise in rates. Janet Yellen, Fed Chair claimed in the conference call with reporters “the Fed should not be responding to ups and downs in the markets. It is certainly not our policy to do so”. Yet on this occasion it appears to have done precisely that.
Thank you Ravi, that certainly clears up a lot of questions that I have had this morning. I’m sure our readers will also get some great value from your views.
However, if you still have unanswered questions on how this could affect you as an investor, the markets or simply want a little more clarity, write your questions in the comments section below!