The US Federal Reserve has once again kept interest rates unchanged at the level they have been at since December 2008 (0% to 0.25%).
There had been a lot of speculation recently that the Fed may raise rates this week. But inflation in the US economy remains low and the Fed has said that it wants to see further improvements in the labour market before raising rates, despite good unemployment figures.
The Federal Open Market Committee said: "The committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
Nick Dixon, Investment Director at Aegon UK, commented:
"Global markets will breathe a sigh of relief today, however it merely delays the first upward move. The Fed looks increasingly likely to blink first in the transatlantic race for interest rate lift off and will move in the next few months, while no-flation in Britain delays the Bank of England's first move until the first half of 2016."
James Sproule, Chief Economist at the Institute of Directors, said:
"The Federal Reserve's decision to hold interest rates is disappointing. It lacks the bold and necessary steps which must be taken to normalise monetary policy. A small increase would have set us on a path to normalising monetary policy and sent a clear message that the US economy can handle – and in fact, needs – higher interest rates.
"The big question now is how the Bank of England responds. The IoD continues to believe that this prolonged period of ultra-loose monetary policy should be called to an end sooner rather than later. The Bank of England appears reluctant to act before the Federal Reserve. Therefore today's decision has implications far beyond the United States.
"It is always tempting to put off a difficult decision. But this should not be a difficult decision for rate-setters in the UK. Britain's labour market is strong. Unemployment is low, vacancies are high, and wages are growing at a decent rate. Growth has returned, businesses are confident and productivity increases are starting to come through. This far in to the business cycle, rate-setters need to wake up to the fact that there are few reasons interest rates should be this low.
"If the Monetary Policy Committee does not begin the gradual and incremental process of normalising rates there is a growing danger that they are simply storing up, if not creating, more difficulties for later on. Rate rises can take a year or more to filter through to the real economy, a rise now would bring some welcome circumspection to investment decisions and asset purchases. Interest rates must go up on this side of the Atlantic at some point. The time is nigh, Mr Carney."
Lisa Hornby, Fixed Income Fund Manager based in Schroders' New York office comments:
"The number of hours spent analysing today's FOMC rate decision must have set some kind of record. Ultimately, the Federal Reserve decided to leave the Federal Funds rate unchanged at 0.25%, citing recent global developments and their potential impact on inflation. The FOMC also published an update to their infamous "dot plot", that is each member's individual projections of where the Fed Funds rate will be for the foreseeable future. The median rate expectation for year-end 2015 through 2017 moved down by approximately one hike per year, with the biggest surprise being that one FOMC member sees the Fed cutting policy rates to below zero and leaving them there until the end of 2016. The FOMC now expects rates to be at 0.375% at year-end, 1.375% by the end of 2016 and 2.625% by the end of 2017. These forecasted policy changes were done in the context of growth expectations being revised higher for the year and unemployment rate expectations being revised lower. Headline inflation expectations were revised down for the foreseeable future.
"The market reaction immediately following the statement was relatively muted. Initially, equity markets moved modestly higher, while 10-year Treasury yields fell towards 2.2% and front end Treasury bonds outperformed longer term Treasury bonds. The Federal Funds market is now pricing in a 25% chance of a rate hike at the October 28th meeting. Going into the statement, the market was pricing in a 32% probability of a rate increase in September, as well as an extremely gradual and atypical hiking cycle, with just under three hikes priced into the market through December 2016. To put that into context, over the past three hiking cycles, the Fed has averaged approximately 17 basis points of rate increases per month (or one hike every Fed meeting). However, even with the Fed's revised projections, the market is still reflecting a much more benign outlook for policy rates than both the Fed and we are expecting.
"All in all, the Fed's economic outlook remains relatively stable and positive. However, it is clear that international developments will dominate Fed policy in the near-term."
Lee Ferridge, head of North American macro strategy, State Street Global Markets, said:
"The consensus going into today's announcement was fairly split on whether rates would be raised. After reading the statement, it seems that concerns over China, late-summer volatility and stubbornly low inflation influenced their decision to keep rates unchanged. Additionally, the Fed's international focus has increased the importance of US dollar strength, with the dollar becoming the doorway by which the global economy affects the domestic one. Now it's a waiting game again and every upcoming meeting is on the table so long as data and conditions can justify a move. However, there is no guarantee that the conditions will be satisfactory ahead of the end of 2015."