3 Takeaways From the Fed’s Interest Rate Announcement

The two-day Federal Reserve policy meeting ended today, and Chairwoman Yellen surprised us all. This been a highly anticipated Federal Reserve meeting, as many economists and Wall Street analysts have been betting that this September meeting would see the first official U.S. interest rate rise since 2006.

The jobs report this month was promising, showing a continued trend of lower unemployment. The dual mandate of the Federal Reserve is to maximize employment rate and foster price stability. While inflation has not reached the long-term goal of 2% (mostly due to falling energy prices), the job report indicated an unemployment rate that is considered within the long-term goal of the Federal Reserve between 5% to 5.2%.

Traders Expected No Change

Those watching the Central Bank were betting on a rate hike. The numbers indicated it was time. Then, China’s stock market went into a downward spiral. Global economic conditions caused concern for a rate hike. Leading into the announcement, economists were split 50/50 for if a hike would happen or not. Traders, however, were feeling confident that a hike would not happen, and the traders were right.
The Federal Reserve announced that they will keep the target range for the federal funds rate at 0% to .25%, as they have since 2008.

3 Takeaways for Investors

1. A 2015 rate hike is looking (a little) less likely. Up until the global economic slowdown of the past month, September was anticipated as the most likely time to increase interest rates. Surprise! They are still not budging. Policymakers are still leaving open the possibility of a small interest rate increase for 2015. However, in today’s meeting 13 of the 17 policymakers said they foresee a rate hike in 2015. This is down from 15 who predicted a rate hike in 2015. Four say that rates should not be raised until at least 2016. Previously only two held that view.
2. FOMC policymakers were not in agreement. Rarely do we witness votes within the Federal Reserve where all FOMC members do not vote together. Jeffrey M. Lacker, President of the Federal Reserve Bank of Richmond, voted against the policy action. He voted to raise the rate by 25 basis points. As the year progresses, and rates remain constant, we will see more policymakers voting against the decision.
3. The Fed gave a nod to global economic weakness. The Federal Reserve’s mandate is to focus on maximum employment and price stability in the U.S. But, in this statement, Yellen recognized that we do live in a global economy. The announcement addresses the primary reason for not increasing interest rates: It’s not because of poor labor statistics, but rather, in view of the economic slowdown abroad. The Fed also downgraded the projections for GDP growth for 2016 and 2017.

In regard to the economic slowdown abroad, the Fed announcement directly stated that exports are “soft.”Raising interest rates also strengthens the dollar as investors seek safer, dollar-denominated investments. A stronger dollar makes exports more expensive in other countries. These global economic conditions would put further pressure on inflation, something the Fed is already concerned isn’t reaching their long-term goal.
Equities rallied on the no-change news from the Fed.
Two FOMC meetings remain for 2015, in October and December.

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