Fed rate decision: What experts said after Janet Yellen did not increase the interest rate

The US Federal Reserve decided on Thursday (17 September) not to increase the interest rate, which was forecast by the majority of economists. However, a more hawkish "hold" was expected, meaning the Fed would hint at a rise in the near future, but refrain from increasing the rate now.

The fact that the rate has not been increased means borrowing will stay at an all-time low of 0-0.25% until at least October, but it appears as if the Federal Open Market Committee (FOMC) is planning on keeping the rate low for a while.

Following the weak inflation data published on 16 September, a slim majority of economists said they expected the Fed to hold the rate, with 47% of experts surveyed by the Financial Times saying chair Janet Yellen would surprise with an increase.

But what are the experts saying now? IBTimes UK rounded up comments from leading economists and analysts to see what this decision means for the global economy.

Who is Janet Yellen, chair of the Fed?

The Federal Reserve chair, who took over from Ben Bernanke in February 2014, had been vice chair since 2010. The 69-year-old New Yorker is a Democrat with degrees from Brown University and Yale University.

She has worked as an academic at several leading institutions such as Harvard and the University of California, but has an even more prominent portfolio as a policymaker. She chaired Bill Clinton's Council of Economic Advisers and used to be the vice chair of the American Economic Association.

She is seen as relatively dovish, although that might have more to do with the timing of her appointment and the slow global recovery from the devastating financial crash in 2008.

Keith Wade, Schroders chief economist, said:

No change in interest rates and a flatter profile for future rate rises signals a step in a more dovish direction by the Federal Reserve. External factors tipped the balance with Federal Reserve (Fed) chair Janet Yellen referencing China concerns during her press conference.

Lower commodity prices and a strong dollar are weighing on consumer prices, giving the US central bank more time to keep rates at close to zero. The Fed is watching carefully for signs of a hard landing in China which would exacerbate deflationary pressure in the world economy.

Deutsche Bank chief economist David Folkerts-Landau did not entirely agree with the Fed. He said:

It is unfortunate that the Fed let recent bouts of volatility in global markets and concerns about growth abroad – especially in emerging market economies and China – stay its hand. Starting the policy normalisation process now would have been absolutely appropriate and frankly long overdue.

US growth remains on solid footing, the labour market is at full employment and inflation, although low, should rise towards the Fed's target of 2%. Current economic conditions are consistent with monetary policy nearer to neutral, that is, a fed funds rate between 2% and 3% and a balance sheet without excess reserves, not the crisis-mode policy that has prevailed to date, with near zero rates and an inflated Fed balance sheet! Maintaining this policy risks exacerbating financial stability and a surge in inflation down the road.

Michael Every, analyst at Rabobank, said the bank had predicted it all along:

In line with our call, the FOMC did not change its target range for the federal funds rate today. The formal statement repeated the key phrase that the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen 'some further improvement' in the labour market and is 'reasonably confident' that inflation will move back to its 2% objective over the medium term. In other words, the Fed thinks that neither criterion is met yet.

In fact, at the press conference Yellen stressed that the first would bolster the second. This underlined that domestic factors are still playing an important role: the Fed wants a further reduction of labour market slack, because that would increase wage pressures and push up core inflation.

With respect to the impact of foreign developments on the US economy, she said that the Committee wants a little bit more time to evaluate. However, she stressed that most participants still expect a hike this year and that we can't expect uncertainty to be fully resolved.

Ozlem Yaylaci, economist at think tank IHS Global Insight, said:

The Fed had enough arguments to justify an interest rate hike in September, but preferred to play it safe and wait longer. It blamed international developments for the hold-off. Today's policy statement added the following: "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.

The Committee was satisfied with the US economy, noting moderate growth in household spending and business fixed investment, along with further improvements in housing markets. However, the committee was likely concerned about the impact of slowdowns in China and other emerging markets on US economic performance and inflation.

As a result, the median forecasts for real GDP growth and core inflation (measured by the personal consumption deflator) were lowered for 2016 and 2017. Yet, in recognition of recent solid job gains and the drop in the unemployment rate to 5.1% in August, unemployment rate projections were also revised downward.

Economists at Investec said the decision brought an end to market uncertainty:

The FOMC kept the Fed funds target on hold at 0.0% to 0.25% at yesterday's meeting. There had been considerable uncertainty among economists and within markets as to whether the Fed would opt for a 25bp hike. The language in the accompanying statement was very similar to that in July. It mentioned again that the economy is expanding at a moderate pace and that the labour market continues to improve.

The key difference though was a couple of references to 'recent global and financial developments' (ie those stemming from China), which the Fed believes may restrain economic activity and put downward pressure on inflation in the near-term, and also that it is monitoring developments abroad. Hawkish Richmond Fed President Jeff Lacker dissented, preferring instead a 25bp increase.

The FOMC's latest forecasts are similar to those in June (the Fed did not update its projections at July's meeting). Changes to the GDP projections are essentially incremental, while the unemployment forecasts are modestly lower. On the inflation side, the projections for this year are a little below those from three months ago and marginally lower for 2016 and 2017.