No change! All change!

18th September 2015

Ian Copelin, Investment Director, my wealth comments “Last night in the US, the Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) concluded their eagerly awaited two-day meeting and left US interest rates unchanged.

Contrary to recent Fed statements, which have intimated that they were intent on raising interest rates, last night’s statement had a very dovish tone.

In justifying their decision, Janet Yellen, the Federal Reserve Chair, surprisingly referred to the lack of inflation and the strong US dollar.  However, falling commodity prices has meant that US inflation, hasn’t been significantly above the central bank’s 2% target since early 2012 (and is currently just 0.2%).  Likewise the US dollar has been strengthening over the past 12 months (which makes exporting harder and has clearly slowed US economic growth).

The decision therefore clearly indicates that the Fed was swayed by the recent volatility in financial markets and the slowdown in the Chinese economy.

A 0.25% increase wouldn’t have significantly altered the financial and business calculations of companies, but would have sent out a message that the 0-0.25% rate range introduced as an emergency 82 months ago wouldn’t be stuck at zero forever and proved that it could be raised.

In addition, a US rate rise yesterday of 0.25% would have given the market some certainty as I believe that it would have been seen as a ‘one-and-done’ move for at least 12 months (I have said before that this is likely to be one of the loosest tightening cycles ever).

I have never seen so much anxiety over an FOMC as yesterday, and although I am sure that all attention will now focus on the Fed’s next meeting October and the following one in December, I believe a US interest rate rise is now next year’s story.  The fact that the Fed didn’t raise interest rates yesterday, in my opinion means that there is no reason to think the Fed will increase rates in October or December – contrary to market expectations – as what will change in the next 3 months?  Inflation still won’t be a problem, while the uncertainty about the effect of China on the global economy won’t be fully known let alone resolved.

The US equity market was very volatile after the Fed’s new found dovishness.  Having been up around 60 points (+0.36%) before the announcement, the market swung several times between positive and negative territory, but finally ended the day down 65.21 points (-0.39%) at 16,674.74.  Meanwhile, in the UK, the FTSE-100 is, as I write, down 45 points (0.73%) at 6,142.”