Fed Remains Cautious On Raising Rates

For yet another time the Federal Reserve (Fed) kept interest rates unchanged and at the same level of the last seven years that led to demand for the EUR/USD. Nine out of ten of the Federal Open Market Committee (FOMC) have backed the decision for the rates to remain stable at the ultra-low 0.25%, except Jeffrey Lacker who proposed for a marginal increase of 0.25%.

The Fed was quite transparent that they were concerned over the state of the global economy, and that pushed them not to proceed with a rate increase. The FOMC said within its statement that the recent weakening of the global economic and financial state might lead to subdued activity, that in turn might prevent inflation growth at least in the near term. A strong indication of the domino effects of a weakening global economy is the recent slowing down of economic growth in China and its stock market crisis, and so traders are worrying that this financial negativity could spread to the U.S. also.

During her scheduled press conference following the FOMC interest rate decision, Fed Chairwoman Janet Yellen admitted that the recent growth slowdown of the Chinese economy has been long expected due to their efforts to rebalance it. But she admitted that the main uncertainty revolves around the magnitude of that slowdown and whether it might be much larger than initially estimated.

There was a lot of hype prior to the release of FOMC’s interest rate decision last Thursday and investors were divided in to the ones who favoured the U.S. central bank to finally proceed with a rate hike and the ones who believed that it would remain at the same level. Despite the speculations, the Fed’s key measures that will largely affect its decision towards increasing the interest rates from the 0.25% level are the improvement of the labour market and inflation to reach the 2% level. U.S. inflation levels remain clearly under pressure because of the crude oil rate’s inability to end its downwards trend, but also because of the dollar’s excess strength that prevents cheap exports.