After the Fed meeting, it's still anyone's guess

Traders on the floor of the New York Stock Exchange after the Federal Reserve chose not to raise interest rates. The Fed said the slump in equities in the past month "may restrain economic activity", which could put "downward pressure on inflation in
Traders on the floor of the New York Stock Exchange after the Federal Reserve chose not to raise interest rates. The Fed said the slump in equities in the past month "may restrain economic activity", which could put "downward pressure on inflation in the near term".PHOTO: AGENCE FRANCE-PRESSE

No US rate hike yet but the market's no less confused and dealers are expecting a Dec hike

RATES LEFT UNTOUCHED

At its just-ended Sept 16-17 policy meeting, the Federal Reserve decided to keep benchmark US interest rates at zero, citing weakness in the global economy and unsettled financial markets.

It would have been the United States central bank's first rate hike in nearly a decade.

A slump in equities over the past month, sparked by fears over the strength of China's economy, "may restrain economic activity", the Fed warned in its statement. This could put "downward pressure on inflation in the near term".

The delay was not a surprise as the majority of traders were betting that the Fed would hold its fire for now.

DOVISH TONE

A more "dovish" Fed is one that is less likely to raise interest rates, as opposed to being "hawkish".

While the Fed maintained its "bias" towards a rate hike sometime this year, the number of policymakers expecting no move this year doubled and officials shaved back their projections of the pace of interest rate increases.

The Fed statement that accompanied the rate decision was also seen as "uber-dovish": "People thought if they weren't going to raise rates this time, they would come out with a hawkish statement, and they didn't do that at all," said Mr Thomas di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets in New York. "If anything, they came out with the contrary statement that was uber-dovish, that they were worried about the international situation."

WORRIES OVER CHINA AND EMERGING MARKETS

Fed chief Janet Yellen told a news conference: "A lot of our focus has been on risks around China, but not just China, emerging markets more generally and how they may spill over to the United States. We've seen significant outflows of capital from those countries, pressures on their exchange rates and concerns about their performance going forward. The question is whether or not there might be a risk of a more abrupt slowdown than most analysts expect." Dr Yellen, in contrast, was relatively bullish about the US economy, saying its strength had impressed Fed policymakers.

MARKETS LEFT CONFUSED

Mr Michael Feroli, US economist at JPMorgan, told the Financial Times: "I came away a little less certain about what are the criteria that are most important right now. It seems like the dollar in particular, as well as financial conditions and the globe, are more important than they seemed a few months ago, in terms of their prominence in Fed communications."

ALL EYES ON DEC RATE LIFT-OFF

There are only two more meetings this year for Fed policymakers, next month and in December. Economists said that based on the Fed announcement's language, they are ruling out next month.

A majority of Wall Street's top banks now expect a December rate hike, according to a Reuters poll.

Twelve of the 17 primary dealers polled said they expect the Fed to raise rates in December. Two pegged the date at the Fed's next rate-setting meeting next month, and three in March 2016.

A version of this article appeared in the print edition of The Straits Times on September 19, 2015, with the headline 'After the Fed meeting, it's still anyone's guess'. Print Edition | Subscribe