18 Sep 2015 09:02

Eight questions and answers about the Fed's rate decision

SEB’s Chief Economist Robert Bergqvist has compiled eight questions and answers related to the Federal Reserve’s announcement on September 17 that they keep the funds rate unchanged. 

1. The US Federal Reserve (Fed) has made its interest rate decision - what was the result?

Answer: The Fed decided to keep the interest rate in the range of 0-0.25 percent. That is where the interest rate has been since December 2008. Fed decided also to keep its large monetary policy portfolio of debt securities unchanged at 4,500 billion dollars. The Fed gave no clear signals about when the interest rate could be raised. Instead it lowered the level of the policy rate – at the end of the forecast period – by 0.25 percentage points to 3.50 percent. Overall, the Fed’s monetary policy decision must be seen as surprisingly "soft". Only one of ten members of the FOMC voted for a September increase; one member wanted a negative policy rate.

2. Was the interest rate decision expected?

Answer: We expected that the Fed would take its first interest step in seven years. The reasons were that the labour market - with an unemployment rate of 5.1 percent – has improved sufficiently, and that the Fed could feel confident that inflation now moves towards the inflation target. Still, the Fed wants to see more evidence of improvement before a lift-off. However, the US economy is on the right track and this was confirmed by the Fed by an upward revision of the GDP growth forecast while the labour market got an improved outlook.

3. Are there other factors that affected the Fed's decision?

Answer: Fed’s Chairwoman Yellen confirmed the clear improvement for growth and employment. At the same she put the focus on the increased risks from emerging economies (not only China) and that the US dollar could strengthen too much. The price of oil remains under downward pressure, and the Fed believes that it will now take somewhat longer time for inflation to return to the inflation target.

4. When can we expect the first US rate hike?

Answer: An overwhelming majority of FOMC still believes that the policy rate will be higher by the end of 2015. This means that our focus is now on the December monetary policy meeting. It is unlikely that the Fed would act at the next meeting in October, because the main policy message from the Fed was so soft.

5. Is the continuation of a US zero rate good for the world?

Answer: A US rate hike had probably contributed to greater optimism and confidence about the future. Now we got another confirmation of the uncertainty that surrounds the world economy. The world is still very dependent on central banks’ zero interest rates and money-printing. This is worrying. Our assessment is that the risk of committing a policy mistake and raise rates too early is limited. A first step would mean that we are still clearly below the estimated neutral level of around 2.25 per cent.

6. What about emerging economies - are they relieved now?

Answer: Emerging economies have in recent years rapidly increased their indebtedness in US dollar. The debt has risen by 1,500 billion to 3,000 billion dollars. These countries are of course vulnerable to rising US interest rates and a stronger dollar. But several EM countries are facing far greater challenges than minor US interest rate increases, problems which are related to structural weaknesses and the political situation.

7. Is Sweden affected by the Fed’s interest rate announcement?

Answer: Not very much. However, a delay of the US rate hike sends a signal that the world's largest economy has weaknesses that make it impossible to raise rates. An increased general uncertainty in the global economy has a negative impact on global growth and hence the demand for Swedish exports.

8. …and the Swedish Riksbank?

Answer: The Fed decision means that the pressure on the Riksbank to continue to pursue an extreme monetary policy remains. The Riksbank had most likely hoped that a US rate hike could have eased the pressure on the Riksbank by giving a stronger dollar and weaker Swedish krona. Apparently, that is not the case right now. However, the European Central Bank’s (ECB) monetary policy is more important for the Swedish monetary policy. The recent policy signals from the ECB are also very dovish and Frankfurt is under some pressure to deliver an even more expansive monetary policy. This means that the Riksbank must keep the door open for another rate cut to keep the Swedish krona undervalued and to raise Swedish weak inflation and wage expectations.