The Fed does not move

edifice-reserve-federale-americaine-washingtonExpected at the turn of the financial world, the US central bank (Fed) finally chose caution opting Thursday to maintain its zero interest rate policy for fear, after the recent financial turmoil and economic uncertainty, particularly in China.

After two days of meeting, the Monetary Policy Committee of the Fed (FOMC) decided to keep the cost of money at its lowest level (from 0 to 0.25%) and not to proceed the first increase in interest rates in nearly a decade.

This wait seems to be largely to recent financial turmoil and economic uncertainty came from emerging markets and in particular the first of them, China, where the downturn growing concern.

“Recent developments in the economy and global finance have little somewhat dampened activity and are likely to exert downward pressure on medium-term inflation,” wrote the FOMC in its final communiqué.

The Fed also took note that it would monitor developments “abroad” may also refer to the recent appreciation of the dollar, weighing on US exports.

The status quo, however, is not unanimous within the Fed’s Management Committee. One member of this Committee, Jeffrey Lacker, has voted against the final decision by indicating that it would have been in favor of a rate hike of a quarter point (0.25%), a scenario that many investors seemed to focus.

Speculation about the markets will then start over again before the next two Fed meetings scheduled by the end of the year. The challenge is not small: investors fear the end of cheap money era who made their fortune in the stock markets.

Emerging countries, they fear that rising interest rates will cause capital flight outside of their territories, to safer and more profitable locations.

Few clues for the future

The FOMC statement will qualify only few additional clues even if the president of the central bank, Janet Yellen should clarify his thought in his press conference, from 14.30.

Painting a positive picture of the US economy, the Federal Reserve, however, seems to suggest that a first increase in policy rates is coming soon, in line with the wish repeatedly expressed by Ms. Yellen to see an increase by the end of year.

According to the Fed, the US economy grew at a pace “moderate” as consumer spending and business investment.

At the heart of the 2008-2009 crisis, the real estate sector gave new signs of “improvement” as the labor market continued to improve.

The US unemployment rate fell to 5.1% in August, the lowest in seven years, a level close to full employment, which is part of the Fed’s objectives.

Caution central bank is also reflected in the new economic forecast it published Thursday.

The Fed is thus more optimistic for growth this year assuming a 2.1% growth year on year in the last quarter 2015, against 1.9% expected in June.

US growth was 3.7% in the second quarter on an annualized basis, marking a partially technical rebound after a first quarter affected by the harsh winter.

But the Fed is more pessimistic for 2016 lowering to 2.3% against 2.5% growth forecast.

On the employment front, the central bank table instead on a widespread recession and sharper than previously forecast as the unemployment rate in 2015 (5.0%) than in 2016 (4.8%).

Inflation should however remain well below the target of 2% annual target by the Fed.

Against the backdrop of receding global oil prices, the consumer price should increase by only 0.4% against 0.7% expected in June.

The goal of 2% annual inflation would be best achieved by formally in 2018 as the Fed hoped to achieve so far in 2017, according to these projections.

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