Time for one last drink before the bar closes. Maybe even a couple. That was the message from the Federal Reserve on Thursday as it kept interest rates on hold and appeared to rule out a move for at least the next three months.
In truth, the decision by the US central bank was not that much of a surprise, although the soft tone of its comments were. Wall Street had not been primed for a move. Only 30% of market participants thought the Fed would move this month, and this is a central bank which prides itself on its communication skills.
No such softening up had taken place and the Fed explained why in the statement outlining its decision. “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” it said. Wall Street’s August wobble has clearly had an impact.
The Fed will get stick for its reticence, with critics noting that the central bank’s longest-serving chairman, William McChesney Martin, once said it was his job to remove the punchbowl just as the party gets going.
These days the Fed is a lot more cautious. This is the weakest recovery the world’s biggest economy has experienced in modern times and even now, more than six years after the trough of the recession, there are mixed signals. The Fed is not entirely convinced that it is party time for the US economy.
As a result, it doesn’t want to be in the position of the Bank of Japan, which twice in the past 20 years misread the economic runes and raised rates, only to find that it had to cut them again shortly afterwards. The Fed believes its credibility would be harmed by a similar volte-face.
Is there really any possibility that a quarter-point rate rise, from the current level of near-zero, would need to be reversed? The Fed appears to think so and will not risk pushing the economy back towards recession.
The Fed is also weighing up the implications of a US interest rate increase on emerging markets, and in particular whether the prospect of higher US yields will intensify capital flows out of countries such as China and Brazil.
So when will rates rise? When there is a further improvement in the jobs market and when the Fed is “reasonably confident” that inflation is on course to move back up to 2%. Not yet, in other words.
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