By Angelo Piro
On September 17, Federal Reserve Chair Janet Yellen announced that the federal funds rate, the benchmark for overall interest rates, would remain near zero after much debate on whether or not to raise it. This came as a surprise to many financial analysts, who had assumed that with the constant growth of the United States economy and drops in the unemployment rate, the market would be strong enough to handle a rise in interest rates, which have been held near zero since the financial crisis in December 2008.
According to CNN, Ms. Yellen cited economic slowdowns abroad, especially the recent downturn of the Chinese economy. “The situation abroad bears close watching. Heightened concerns about growth in China and other emerging market economies have led to notable volatility in financial markets,” she said.
The market volatility that Ms. Yellen mentioned could be seen in the previous day’s trading. There were massive drops in all markets following an announcement that China would continue its policy of massive currency manipulation, choosing to further devalue its currency, the yuan. This move signals a further slowdown in the Chinese economy. The Chinese economy went from being a global leader to complete stagnation as China struggles to transition to a new economy separate from government and construction spending.
While there was an overall positive reaction to the Fed’s rate decision at home, this was not so abroad. Many stock markets, including Japan, dropped following the news that the Fed rates would remain unchanged.
At home, the dollar saw mild growth, paired with drops in prices of commodities, such as oil. The stock market also saw a 150-point jump that settled down to their original levels, even after hints that the Fed was still considering raising rates at a later date.
Speaking a week later, Ms. Yellen defended the Federal Reserve Board’s decision to keep interest rates as they are, saying that the Fed would probably still raise interest rates in the near future, at least by the end of 2015. She said that the Fed expects the strong labor numbers to continue and inflation targets to follow soon after. The Federal Reserve has two more meetings this year to make that decision, one in October and one in December.
Though the decision to keep interest rates the same was a disappointment for some, there was a lot of good news that resulted from the Fed meeting. In their economic analysis, the Fed board gave many heartening predictions, including strong economic growth in the coming year, that recent stock volatility would likely have little impact on the overall economy, and that the unemployment rate would dip below five percent before the year is out. The current unemployment rate is 5.1 percent, the lowest it has been since the 2008 financial crisis.