Market volatility eases as Fed signals no rush to lift rates

WASHINGTON • US Federal Reserve chair Janet Yellen becalmed markets around the world by signalling she is in no rush to raise interest rates, sending volatility down in bonds, stocks and currencies.

In a statement issued after a two-day meeting of its policymaking committee, the Fed painted a mixed picture of the US economy.

"Labour market conditions have improved further even as growth in economic activity appears to have slowed," the Federal Open Market Committee said. It also noted that incomes had climbed while household spending had slowed.

The case against higher rates is basically that it makes sense to err on the side of stimulus. By holding borrowing costs at low levels, Fed officials say, it will be relatively easy to respond to stronger inflation by doing less to encourage spending and borrowing.

If the Fed raises rates prematurely, however, it will have little room to correct the error by doing more. The central bank left itself room to manoeuvre, however, and its two-handed assessment of economic conditions appeared to confuse financial markets.

The Nasdaq 100 Index fell 0.8 per cent to the lowest in nearly a month. The S&P 500 rose 0.2 per cent to 2,095.15 at 4pm in New York on Wednesday after erasing a decline of as much as 0.5 per cent. The Dow Jones Industrial Average added 51.23 points, or 0.3 per cent, to 18,041.55, even with a roughly 45-point negative drag from Apple.

"Looks as if we will continue with the 'slower growth, lower rates for longer' scenario," said Mr Chris Gaffney, president of EverBank World Markets. "Nothing here would indicate a June hike is any more likely than before the statement. Markets are still predicting a 'hold' in interest rates until the end of 2016."

The Fed's focus will be on employment, economic growth and, perhaps most importantly, whether inflation begins to show any evidence of increasing from its current low level to the central bank's 2 per cent target.

BLOOMBERG, NEW YORK TIMES

A version of this article appeared in the print edition of The Straits Times on April 29, 2016, with the headline 'Market volatility eases as Fed signals no rush to lift rates'. Print Edition | Subscribe