Federal Reserve Leaves Interest Rate On Hold

In December 2015, the US Federal Reserve ended its policy of a near zero interest rate which had been in place for seven years, marking the first hike in interest rates in nearly a decade (June 2006). The decision to start the process of “normalising” interest rates had been long awaited and anticipated ever since the end of the Reserves asset purchase programme in October 2014. The plan was that, with a return to more usual economic behaviour, interest rates would be eased upwards at four of the Federal Reserve meetings in 2016. However, the Bear market that greeted the start of 2016 fuelled (sorry!) by the collapse in the oil price and concerns that the Chinese economy was slowing, have changed the game.

Whilst the collapse of the oil price is a recent concern for markets, it started back in the days of the Global Financial Crisis when a barrel of crude would set you back $140 (and it fell to below the $40 mark). It had recovered to $120 by late 2011 and held between $100-120 until the most recent shock began in June 2014, falling to less than $30 this year before recovering somewhat, to the $40 mark. Equally, the world has known that the Chinese economy is slowing (but still expanding at an exceptional rate) for a couple of years now, but markets are not rational things and the Federal Reserve must consider sentiment as much as more tangible macroeconomic indicators.

As a consequence of all this, the Federal Reserve has left interest rates on hold at between 0.25 and 0.5% for the time being and now suggests that only two incremental rises in rates are on the cards for 2016. It also trimmed back its growth forecast for the year from 2.4% to 2.2%, however, it believes that the US employment situation was continuing to strengthen and that inflation would edge upwards towards its target value of 2% over a longer term.