THE world will have to wait for the first American rate increase of the Twitter and iPhone age. Citing concerns about the global economy, the Fed decided to leave rates unchanged at 0-0.25%. Jeffrey Lacker was the one Fed governor to dissent, arguing for a quarter-point increase.
In the run-up to the announcement, investors seemed to have anticipated the Fed's inaction but markets were concerned by the tone of the statement. The Dow Jones Industrial Average and the S&P 500 bounced around as investors absorbed the news. But bond yields fell with the 10-year yield dropping from 2.26% just before the announcement to 2.22%, and the 2-year yield falling from 0.775% to 0.72%.
The medium-term casualty of the announcement will be the dollar. The greenback had been strengthening for much of the year (see chart) on the expectation that higher rates would attract foreign capital. But the dollar dropped against the euro and the yen in the absence of higher rates.
In a sense, the statement may add to investor uncertainty. Rather than looking simply at the domestic economy, the Fed is now taking notice of global developments. But that makes it harder for investors to assess which data to monitor and when the Fed will consider the global backdrop has improved. Further volatility...Continue reading
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