Federal Reserve Maintains US Interest Rates at Near Zero Levels
Despite some concern about inflation, the US Federal Reserve stated that it will keep interest rates close to zero. The central bank announced this after the two-day policy meeting (Federal Open Market Committee, FOMC). Ahead of the meeting, market participants had increasingly speculated about the chance of sooner-than-expected US interest rate hikes as US economic data has generally been positive (including 4.2 percent GDP growth in the second quarter and weekly jobless claims that declined to near record lows).
However, the Fed also detected that US labour resources remained significantly underutilized and the unemployment rate’s rapid descent had stopped. US unemployment and underemployment remain a concern. Furthermore, the Fed has slightly trimmed its forecast for US economic growth in the years ahead. Economic growth in 2014 is downgraded to between 2.0 and 2.2 percent (from the range of 2.1-2.3 percent) and to between 2.6 and 3.0 percent in 2015 (from the range of 3.0 and 3.2 percent). Extending the low interest rate environment in the USA is therefore expected to support the momentum of economic recovery. Fed Chair Janet Yellen stated on previous occasions that she supports a longer period of near zero interest rates. The decision to raise the Fed’s key interest rate will be “data dependent”, Yellen said on Wednesday (17/09). The Fed’s interest rate has been near zero since December 2008. Most analysts expect the benchmark to be raised in the second or third quarter of 2015. This would be in line with the Fed’s statements that it will leave the interest rate unchanged for a considerable time after the bond-buying program has ended.
As had already been expected by the market, the Fed continued to wind down its bond-buying program (quantitative easing) by another chunk of USD $10 billion (per month). The central bank will now print USD $15 billion for the purchase of treasury debt and mortgage-backed securities. Provided no new economic shocks occur, the US bond-buying program will cease to be next month.
As a result of the outcome of the FOMC meeting, the Dow Jones Industrial Average reached a new record high at 17,156.85 points on Wednesday (17/09).
The Fed’s decision to leave interest rates unchanged (for the time being), in combination with increased stimulus in China, is expected to have a positive impact on Indonesian stocks today. Reportedly, China’s central bank (PBOC) injected USD $82 billion into the country's five largest banks in an effort to boost economic growth of the world’s second-largest economy.