The real surprise from the Fed decision to leave rates unchanged

Federal Reserve Board Chairwoman Janet Yellen answers questions at a news conference following a Federal Open Market Committee meeting on Sept 17, 2015, in Washington, DC.
Federal Reserve Board Chairwoman Janet Yellen answers questions at a news conference following a Federal Open Market Committee meeting on Sept 17, 2015, in Washington, DC. PHOTO: AFP

SINGAPORE - After months of angst and anticipation, the Federal Reserve announced on Thursday (Sept 17) that it is keeping US interest rates unchanged at zero where it has been for nearly a decade.

That was no surprise. Up to the wire, only one-third of bond traders were expecting a rate hike and it was 50:50 with economists.

No, the real surprise came in why the Fed held its hand, again.

CNBC editor Bob Pisani put it this way: Did the Fed just introduce a third mandate? From looking after 1) US inflation and 2) US job creation is the Fed now making itself responsible for 3) everything else?

He pointed to the sentence in the Fed statement that he said had everyone talking: "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."

Said Mr Pisani: "Having introduced the global economy as a factor in your decision-making, how do you turn this ship around? Do you not raise rates until the Shanghai stock index recovers? What's the criteria for that? Are we also now 'data dependent' on Chinese GDP?...There's a real problem when the Fed starts acting as the global banker of last resort."

Another commentator, James Saft, writing for Reuters, said the Fed had "tied itself to China's mast", noting, like Mr Pisani, that Fed chair Janet Yellen at the press conference after the rate announcement had drawn an explicit line between the decision and developments in China.

"We focused particularly on China and emerging markets," Ms Yellen said, adding that the issue was "whether or not there might be a risk of a more abrupt slowdown" than expected.

Mr Pisani conceded that some will argue that his view is an exaggeration and that the Fed is not introducing a third mandate, but merely acknowledging the interconnection of the global economy. So the US economy ignoring a slowdown in China, for instance, is doing so at its own peril.

As a Reuters analysis puts it, is this the new normal? A butterfly-effect economy where a market ripple in China can tighten financial conditions in the US and change the course of the Fed.

Now that would make for more uncertain times ahead.