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Quick Update: No Change From Janet & Fed Yet
September 21, 2015

In its latest monetary policy statement, the US Federal Reserve announced that the benchmark Fed Funds rate would be kept between its 0.00% - 0.25% range. We look at some of the implications for investors in this quick update.

Author : iFAST Research

 Important Update: IDFC Premier Equity Fund

What Has Just Happened?

In its latest monetary policy statement, the US FOMC (Federal Open Market Committee) announced that it would retain the benchmark Fed Funds rate between its 0.00% to 0.25% bound – a move which was largely expected by consensus forecasts and market participants.

Contributing to the Fed's decision to leave policy rates unchanged was its emphasis on monitoring global economic conditions as well as financial market developments, and how they could affect the outlook for the US. Federal Reserve chairwoman Janet Yellen, during the release of the FOMC statement as well as during the preliminary press conference statement, mentioned that "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." She also added that the Fed "is monitoring developments abroad." With regards to the US economy, Yellen mentioned that "household spending and business fixed investment have been increasing moderately," while reiterating once again that the housing sector continues to see improvement but "net exports have been soft."

While the Fed has historically excluded developments abroad from its monetary policy decisions, the inclusion of its monitoring of such developments in its latest statement reflects a Fed that is more cognisant of a feedback loop due to globalisation. Citing "sizeable outflows" from emerging market countries, Yellen's comments that officials are watching risks stemming from emerging markets for signs they will affect the US reinforces the notion of a Fed that is no longer solely inward looking.

Following the policy statement announcement, the short-end of the US yield curve saw yields decline, while the yield on the US 10 Year Treasury Note fell by -10 basis points throughout the intra-day session, declining from 2.29% to 2.19%. US equities traded in a volatile manner, with the benchmark S&P 500 index rallying to a week-high of 2020.86 before falling -1.52% and settling close to 1990. The USD weakened against most currencies, with the Dollar Index falling by -0.92% by the end of the trading session. Gold prices rallied by 1.80% intra-day before closing at USD 1131.55 per ounce.

Implication For Investors

While the Fed did not make its initial move this time round, investors should not believe that the low interest rate environment is here to stay forever given that the majority of policy-makers continue to believe that it is appropriate to hike policy rates before the end of 2015. As we have reiterated and guided for, a hike in policy rates by the Federal Reserve has been on the cards given that the Fed has constantly mentioned its data-dependent approach for its monetary policy guidance. A gradual pace in the coming rate hike cycle is expected as policy-makers continue to weigh economic progress in both the US as well as the global economic environment, with the latter being a factor that the Fed has historically excluded in its monetary policy decisions. It is also to be noted that inflationary pressures remain relatively benign at this current point of time – giving the Fed leeway to adopt a deliberate and prudent approach.

Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website.

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