US Fed holds rates steady, hints at gradual increases

The US Federal Reserve decided on Wednesday to leave interest rates unchanged, as it said it was "closely monitoring" global economic developments. 

“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run,” The Federal Open Market Committee (FOMC) said.

The statement added that the outlook for further rate hikes would “depend on the economic outlook as informed by incoming data,” but at the same time did not rule out a possible rate increase in March.

US equity markets fell into the red following the announcement. The Dow Jones Industrial Average (DJIA) dropped over 1.5 percent following the news while the S&P 500 fell by 1.4 percent.

An overwhelming majority of analysts had predicted no policy change to come out of the two-day policy meeting. Instead, most were looking for clues on when future rate hikes might possibly kick in this year.

Mohamed Abdelmeguid, an economist at the UK-based Economic Intelligence Unit (EIU) told Argaam the decision was “hardly surprising” given the recent routs in global markets, falling oil prices, and heightened concerns over a slowdown in China’s economy.

“I think the choice to postpone rate hikes will be welcome news for Europe and Japan, who may be looking to extend accommodative monetary policies, and emerging markets, where there are growing concerns over rising costs of borrowing (and debt servicing), weakening currencies and capital outflows,” Abdelmeguid said.

As for the impact of higher-interest rates on GCC economies, Abdelmeguid says he expects the pressure to build in the near future.

“GCC governments are likely to see money market rates going up as local banks struggle even more with tighter liquidity in 2016,” he added. “From an emerging-market perspective, pressure to raise interest rates will be amplified by the likely further tightening of monetary policy in the US.”

Although the Fed did share some positive news on an improving US labor market, a lot more needs to happen before it can seriously consider another rate hike.

“There is still a good possibility for the Fed to hike rates during H1 2016, this can be seen from April or May,” Shoaib Abedi, director at the London-based financial services firm ICM Capital, told Argaam.

“To see such hikes, we need to keep an eye on US labour market data and GDP data, while the main challenge will be inflation figures which can start to affect the Fed decision if prices continue to fall,” he added.

Write to Joumana Saad at joumana.saad@argaamplus.com