Fed leaves rates unchanged on global meltdown concerns

In a relief to global markets, the US Federal Reserve left rates unchanged saying it had looked at the broader global perspective and not just the US economy. It however, left open the possibility of a modest policy tightening later this year.

Fed Chairwoman Janet Yellen stressed that the stock market panic abroad, notably in China, and in US markets had "not fundamentally altered" the committee's outlook." She expressed the view that the labour market in the US was close to full employment, and that she was reasonably confident that the inflation rate would drift back up to around 2%. America's central bank has not raised rates in almost a decade which have been stuck near zero since the depths of the financial crisis in December 2008.

In the past few months, world markets have experienced extreme volatility with China leading the pack. China's plunging stocks have been a result of the devaluation of its currency, yuan amid large sell-offs in the Chinese markets which have lost close to 17% in the just the last month.

Ahead of the crucial Fed meeting, officials from both the International Monetary Fund and the World Bank issued warnings about the consequences of a US rate hike, urging the Fed to act with caution. In an interview with the Financial Times, Kaushik Basu, chief economist at the World Bank, had said a Fed rate rise could trigger "panic and turmoil" in emerging markets and thus it should delay a rate hike.

Dow Jones falls

However, US stock markets responded negatively to the Fed decision. The Dow Jones industrial average finished 65.21 points or 0.4%, lower at 16,674.74 as the S&P 500 closed lower by 5.11 points or 0.26% to 1990.20, while the Nasdaq Composite eked out mild gains to close up by 4.71 points, or 0.1% at 4,893.95. Financial stocks bore the brunt as banks that would enjoy plum profits from higher rates have been disappointed by the Fed decision. The US dollar too fell sharply against a basket of currencies after the release of the statement.

As for the global markets, the FTSE 100 index (the largest blue-chip companies listed in London) fell by 42 points, or 0.7%. Japan's Nikkei snapped a three-day winning streak on Friday (18 September) falling by over 250 points or 1.4% in mid-morning trade. In other Asian markets, China's Hang Seng was up by close to 140 points or 0.6% testing the 22,000 mark, while Australia's ASX was up by 45 points or 0.88% at 5192.