WASHINGTON/NEW DELHI: The Federal Reserve held its key interest rate locked at zero on Thursday, pointing to the downturn in the global economy even as US growth remains steady.
Had the Fed increased rates, money could have been lent out at higher interest in the US. This in turn could have persuaded foreign investors to pull out money from emerging markets like India and pump it into the US economy. The flight of capital had begun ever since the Fed announced that it was toying with the prospect of a rate hike.
However, the central bank kept its interest rates untouched.But members of the policy-making Federal Open Market Committee made clear, in projections accompanying their announcement on Thursday, that they still expect rates to rise by the end of the year.
Federal Reserve Chair Janet Yellen said on Thursday that the global economic outlook was “uncertain” in explaining the Fed’s decision to not raise interest rates at this time. “The outlook abroad appears to have become more uncertain of late. And heightened concerns about growth in China and other emerging market economies have led to volatility in financial markets,” she said.
The Federal Open Market Committee had spent two days discussing whether to undertake the first increase in the benchmark federal funds rate in more than nine years, breaking away from the extremely easy-money policy stance dating to the 2008 financial crisis.
One key guide to policy, the strength of the labour market, had improved since the July meeting, it said. However inflation, another prime input into policy decisions, had weakened.
“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,” the Fed said.
In a clear reference to the recent turmoil provoked by the downturn in the Chinese economy, the Fed noted that it is “monitoring developments abroad,” even as it said that the risks facing the US economy are still “nearly balanced.”
Following the decision, stocks remained choppy, mostly making marginal gains. The dollar meanwhile, fell nearly 1 per cent to $1.1395 against the Euro.
Earlier in the day, the Indian government expressed confidence of weathering its impact with “multiple layers of defence” and RBI’s preparedness to deal with the situation. “Because we have built those layers of defence, whether it is the fundamentals of our economy, whether it is our foreign exchange reserves, whether it is our ability to access various markets, we can deal with those types of macro events,” Sinha added.