Thursday September 17

Stock indexes decline as the Fed holds off from raising interest rates. The S&P 500 fell 0.3% to 1,990 and the Dow Jones lost 0.4% to 16,674. The Fed expressed concern over the impact of the global economic landscape. Stock markets had advanced leading up to the meeting pricing in the possibility that rates will stay lower for longer. Slight declines seen today were largely do to the Fed’s outlook on the global economy and the potential effects this may have on US companies. Yields fell with the ten year falling 6 basis points to 2.21% after the announcement. Financial stocks responded negatively to lower rates, as their interest income increases when they are able to charge more to borrowers. Stocks that are more sensitive to rate rises, such as utility companies that pay dividends rose marginally. Rates are still expected to rise this year, with thirteen of seventeen FOMC members hoping to raise rates. The odds for a rate increase in October are still only 25% and 54% for December.

The results from the FOMC meeting appear to show that the decision to not raise interest rates this month was not a close debate between hawks and doves. Comments made in recent months suggested that it may have been a strong debate with divided opinions from both ends of the spectrum. The tone of the meeting was that the FOMC is concerned about how slow global growth will impact the US. The dot plot showed that rates are expected to rise only once for the remainder of the year. The long run projection for the Fed funds rate fell from 3.75% to 3.5% as the trajectory for rates continues to decline. Core inflation has been trending downward over the past few years, and by implementing lower rates for longer the Fed hopes to combat this trend.
ECB officials wait for the Fed to tighten monetary conditions. The ECB is hoping to welcome monetary policy divergence as a stronger dollar relative to the euro is a positive factor for European companies as their products will become less expensive for Americans to buy. TIghtening in the US will be another form of divergence that will benefit the European economy on top of low yields provided by ECB quantitative easing. Following the Fed’s announcement the euro climbed above $1.13.
Similarly the Fed’s decision to hold off may further influence the Bank of Japan to continue monetary easing. Japan is also set to benefit from rising rates in the US. The Japanese economy continues to struggle, as 2Q GDP showed contraction in the second quarter and core CPI for August showed that prices fell 0.6% from the previous year indicating inflation. As a result the Bank of Japan is buying Y80tn government bonds each year ($667Bn) in order to push down yields to spur growth and inflation. The prospect of lower yields for longer in the US goes against the objectives of the BoJ as it has appreciated the yen against the dollar in the short term. The yen trades against the dollar at Y120 which is up from Y125 in August. By holding off in raising rates the BoJ may be forced to act even more aggressively to support their economy.
Thursday September 17

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