Investment Clock insights

Fed on hold, bullish for markets


Trevor Greetham

18 September 2015

The Federal Reserve left rates on hold and is explicitly monitoring developments abroad and in financial markets, implying a lower path for interest rates than would have been the case without China’s devaluation and the stock market slide. Interestingly, one Federal Open Market Committee (FOMC) member now forecasts a negative Fed Funds rate by year end, following the lead set by the European Central Bank.

 

This is exactly what you want to see as an equity investor. Stock markets had to process the bad news from China up front in the form of earnings downgrades for internationally exposed companies. This is the good news: developed economy central banks are adjusting the path of monetary policy so a stronger domestic economy can offset weakness from overseas.

With investor sentiment indicators at extremely depressed levels, this news should underpin a rally in stocks but it is bearish for the US dollar. I wouldn't be surprised to see a bounce in emerging markets and commodities but one I would want to sell into with China continuing to slow."

Ian Kernohan, RLAM's Chief Economist added:

"It seems that the Fed are always coming up with reasons not to raise interest rates.  For much of this year, the FOMC steered the market to expect a rate hike, as long as the US labour market data continued to improve.  The labour market has continued to heal in line with their expectations, however the spike in financial market volatility during August has clearly had an impact on the decision to keep rates on hold.  The accompanying statement suggests that a hike is still very much in the offing, possibly in October, however there may be yet another reason to hold off next month.  If the Fed are waiting for all the ducks to be in line, it will be a long wait."