The Market Response:
Government of Canada Bond Yields immediately dropped by 5% in the wake of the announcement. The Loonie on the other hand rose slightly, while a further dip was likely had there been a rate hike. Oil wasn’t noticeably affected by the announcement, but overall the markets certainly approved.
What the Federal Reserve Said:
“Monetary Policy will remain significantly accommodative for quite some time.”
US GDP expanded at 2.25% in the first half of 2015 which was stronger than the Fed expected. However, Inflation is running below the Feds objective.”
There are many factors at play that lead to the Fed’s decision to keep rates where they are and maintain an accommodative monetary policy.
These factors are as follows:
- Global Economic Risks. This means that U.S. rates are partly determined by how bad the situation in China becomes.
- Lower Inflation. Due to weak oil prices and a stronger US Dollar it is taking longer for Inflation to get to the Federal Reserve’s 2% target.
- Labour Market. The employment rate is still not where the Fed would like it to be. Clearly employment is a big factor in the decision to keep rates where they are.
Although most Fed insiders continue to believe that rates will increase in 2015, some participants now believe that a rate hike should be put off until 2016. But regardless of when the hike occurs, and by how much, the Fed was very clear that their policies would remain highly accommodative for some time. If and when rates do begin to increase, they will likely increase very slowly and be accompanied by continued monetary stimulus.