Wall Street and the U.S. dollar fell as world market instability led the U.S. Federal Reserve to hold fast on the benchmark interest rate earlier today.
The Fed – or Federal Reserve System, the central banking system of the United States – issued a press release on monetary policy after holding the first rate-setting meeting for 2016. The media release specifically mentions world market conditions as the reason for their cautious approach.
“The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”
Turbulent world market conditions make U.S. growth prospects riskier and the Fed’s prudence was not unexpected. World market observers were expecting a conservative approach in view of the volatility of global financial markets and they weren’t surprised by the results despite the Fed’s earlier optimism of growth prospects just over a month ago.
On December 16, the last time the monetary policy committee met, they issued a rate hike of 25 basis points – a historic first since 2006. The Fed Committee had projected four additional increases of 25 basis points in the trend setting interest rate through 2016. However, increasing volatility in the world market in the intervening weeks has cast a shadow of doubt on those growth projections.
Today’s announcement by the Fed adds to the uncertainty over any future rate hikes, although there was also cautious optimism in the face of their assessment of world market conditions. The door remains open to an increase on March 16 when the Fed Committee holds their next monetary policy meeting. In contrast with their concerns over the world market, central bankers noted that moderate domestic economic growth is still expected n the U.S., along with acknowledging strength in the labor markets. Specifically, they cited positive growth in the housing market, business investment and household spending. Inflation in the U.S. is expected to continue to remain low for the immediate future, with a rise to 2 percent in the medium term.
The current world market roller coaster ride has seen an alarming drop in the value of both U.S. and global equities markets. In the week before the announcement, world market volatility saw Chinese stocks post a late recovery while European markets slid, joining crude oil prices, the U.S. dollar and Wall Street on a downward spiral. Even world market icon Apple forecast its first drop in revenues in 13 years.
World market trends have been worrisome over the last few weeks, with the Standard & Poor 500 Index falling over 9 percent and a drop in oil prices of 15 percent. The major downward pressure comes from falling oil prices, which has had a dampening effect on other commodity prices such as precious metals.
New Zealand’s central bank followed suit with the Fed by leaving interests unchanged. After the Fed’s announcement at market close on Wednesday, all major U.S. markets were down, including Wall Street, the Down Jones industrial average, the S&P 500 index and the NASDAQ composite index, all of which declined between 1.1 and 2 percent. In contrast, oil futures retained the day’s gains and crude oil was also up nearly 1.8 percent on the New York Mercantile Exchange. Brent crude, the international standard, was up 3.6 percent. The Hang Seng (Hong Kong) market rose slightly after the news while the Shanghai Composite fell. The Japanese Nikkei Index and other Asian markets saw small gains.
The CME Group 30-Day Fed Fund futures prices is a window into how the world market views upcoming changes in U.S. monetary policy. The probability of a rate hike at the March 16, 2016 Fed meeting is currently set at 25 percent as world market conditions continue to show instability.