Well, that was a bit of an anti-climax wasn’t it?
After months of anticipation, the US Federal Reserve has decided to keep interest rates at their ultra-low levels – a decision that was made during the depths of the global financial crisis as an ‘emergency’ policy.
The uncertainty surrounding the future of US monetary policy has been (behind China’s woes) one of the major catalysts for the recent volatility and falls in global equity markets as many commentators were expecting this week’s FOMC meeting to lead to the long awaited lift-off date.
Performance of indices since April 2015
Source: FE Analytics
However, the recent volatility in markets, concerns over the Chinese economy and stubbornly low inflation led only one of the 12 FOMC members to vote for a 0.25 per cent rise in the federal funds rate.
Though this decision suggests a continuation of loose monetary policy (for the time being anyway), equity markets have reacted in a relatively negative way with the FTSE 100, Dow Jones, Nikkei and Eurofirst 3000 all posting losses.
It has also led to weakness in the dollar while developed market government bonds have all rallied with yields falling across the board.
So that’s how markets have reacted, but what do the industry experts make of the Fed’s decision? Here we highlight a selection of opinions from leading market commentators on what it means for investors.
Neptune: “Rates will still rise before the New Year”
Firstly, Felix Wintle (pictured) – manager of the Neptune US Opportunities fund – thinks that a hike in rates has only been delayed for a matter of months. 
“The Fed has kept rates on hold again whilst keeping its language dovish in terms of future action. This should not surprise investors too much, as this course of action was broadly expected by the market.
“At Neptune, we are still confident that the Fed will raise rates in 2015 and believe that December is now the most likely time for this.”
“Whilst the language accompanying the decision was dovish, we believe that rate rises may come quicker than the market expects. Over the last three rate rising cycles the Fed has consistently been more hawkish than they originally projected so, if they stay true to history, this is a distinct possibility.”
“However, as Janet Yellen said, the Fed remains data dependent with regard to rate hikes and we expect economic data in Q3 and Q4 to likely be supportive of action.”
Fidelity: “Holding rates is warranted”
On the other hand, Anna Stupnytska, global economist at Fidelity Worldwide Investments, thinks that holding rates was the best decision for now given what has been going on in global markets.
“The Fed left rates on hold at the September FOMC meeting, in line with my expectations.”
“While the FOMC signalled continued confidence in the state of the US economy, it was made clear that, together with the low level of inflation, external risks and financial market developments became decisive factors against the hike this time.”
“The recent tightening in US financial conditions, driven by the strong US dollar and the August sell-off, if sustained, could indeed ultimately result in slower US growth. The state of the Chinese economy and vulnerabilities of other emerging markets add to the overall uncertainty at this point.”
“In this environment it came as no big surprise that the Fed decided to remain in the ‘wait and see’ mode for now. I believe a December hike is still likely at this point, provided data holds up, inflation and inflation expectations show some tentative signs of a reversal and financial conditions ease somewhat.”
“But risks are skewed towards the hiking timeline shifting into 2016 altogether.”
De Vere: “The Fed is creating more uncertainty in markets”
Nigel Green, chief executive officer at de Vere Group, thinks very differently, however. He thinks that the Fed is just fuelling further market uncertainty by not raising interest rates and therefore investors should expect volatility to persist for some time come.
“With half the investment community believing the Fed would this month raise rates, and half not, whatever the final outcome was, there is bound to be volatility – and this should be expected until the end of the year.”
“However, with the Fed, the world’s de facto central bank, keeping interest rates at historic lows, it is itself fuelling more uncertainty in global markets than if it had raised them.”
“A rate raise hasn’t happened this time, but it is on its way, it will happen eventually and probably as Janet Yellen, the Fed’s Chair, hinted before the end of the year. Therefore, the countdown clock has simply been reset. Of course, this is a trigger for short-term volatility.”
“The U.S. economy is no longer in the Emergency Room, so by not raising interest rates, the Fed is, in effect, sending out a clear message that it is nervous about China, and the impact a potential hard landing could have on U.S. and global growth. This concern over global developments is bound to prompt uncertainty too.”
Western Union: “This shows China really does matter”
However, Nawaz Ali, UK market analyst at Western Union, thinks that the decision was warranted and goes on to suggest that the Fed will be keeping a close eye on China just as much as they will be watching developments closer to home.
“Today’s decision by the Fed not to raise rates tells you that China really does matter. It matters both in the context of inflation and financial market stability.”
“If China’s economic slowdown deepens, and this continues to put downward pressure on commodity markets, the Fed won’t find the inflation it’s looking for anytime soon.”
“This means the US dollar should come under more selling pressure in currency markets but once the dust settles traders may turn their attention towards the Euro.”
“The more the Fed delays because of uncertain global developments, the more chance we have of seeing the European Central Bank ramping up its quantitative easing programme to ensure the eurozone recovery does not falter.”
Royal London: “This is great news for equity investors”
Finally, Trevor Greetham (pictured) – head of multi asset at Royal London – says equity investors should be very happy with the decision. In fact, he thinks a continuation of looser monetary will spark a rally in equities. 
“This is what you want to see as an equity investor.”
“The Federal Reserve left rates on hold and is explicitly monitoring developments abroad and in financial markets, implying a lower path for interest rates than would have been the case without China’s devaluation and the stock market slide.”
Interestingly, one FOMC member now forecasts a negative Fed funds rate by year end, following the lead set by the European Central Bank.
“Stock markets had to process the bad news from China up front in the form of earnings downgrades for internationally exposed companies. This is the good news: developed economy central banks are adjusting the path of monetary policy so a stronger domestic economy can offset weakness from overseas.”
“With investor sentiment indicators at extremely depressed levels, this news should underpin a rally in stocks but it is bearish for the US dollar. I wouldn't be surprised to see a bounce in emerging markets and commodities, but one I would want to sell into with China continuing to slow.”
