Talk Money with Tony Field – September 18, 2015


To say that today's interest rate decision by the Federal Reserve was keenly awaited would be to wildly understate its importance.

All markets, from stocks to commodities to bonds, were waiting for the announcement at 6am New Zealand time. The markets were virtually on hold ahead of the decision.

Would the Federal Reserve hike rates for the first time in nine years?

It was always going to be a 50/50 call. But in the end the Fed decided that although the US economy is improving the federal funds rate would remain in a target range of between 0 and 0.25 percent.

The Kiwi was trading at around 63.20 US cents before the announcement. It quickly pushed up through 64 cents and was heading towards 64.50 cents. But it by 8am it had fallen back to around 63.80 cents.

US share markets struggled to find a clear direction. The Dow Jones industrial average dipped in and out of positive territory, reflecting the uncertainty about the state of the global economy and the continuing questions about when the Federal Reserve will hike rates.

It appears the Fed's policy committee has been unnerved by the slowdown in China and the recent volatility in global markets.

Although the Fed kept rates unchanged it is leaving open the possibility of a modest rate hike later in the year.

Thirty minutes after the announcement Federal Reserve chair Janet Yellen held a news conference where she was questioned about the decision.

She explained that concern about the global economy was a factor in convincing the Fed not to go ahead with a rate increase.

"In light of the heightened uncertainties abroad and a slightly softer expected path for inflation, the committee judged it appropriate to wait for more evidence, including some further improvement in the labour market, to bolster its confidence that inflation will rise to 2 percent in the medium-term," she said.

The US unemployment rate has fallen to 5.1 percent and there is steady economic growth. But there is no sign that inflation has begun to rise towards the Fed's target of 2 percent. In fact, the Fed thinks that in the short term inflation could fall even further.

Ms Yellen said that is "partly reflecting declines in energy and import prices. My colleagues and I continue to expect that the effects of these factors on inflation will be transitory. However, the recent additional decline in oil prices and further appreciation of the dollar mean that it will take a bit more time for these effects to fully dissipate."

She said there was an argument for a rate hike today, because "the recovery from the Great Recession has advanced sufficiently far and domestic spending appears sufficiently robust".

"The economy has been performing well and we expect it to continue to do so."

But it seems the US economy has still not improved enough for a rate hike.

Wall Street is still mulling over the decision and its implications.

The Dow Jones industrial average and the broader S&P500 both finished lower. But the tech heavy Nasdaq made a very modest gain.

The Dow slipped 0.26 percent, or 43 points, to close at 16696.

The S&P500 also lost 0.26 percent, or 5 points, to finish at 1990.

The Nasdaq rose 0.10 percent, or 4 points, to 4893.

Oil prices dipped following the decision by the Federal Reserve to keep its key interest rate at zero.

The decision saw West Texas crude ease by 25 cents to $US46.90 a barrel.

European benchmark Brent oil fell 67 cents to $US49.08 a barrel.

Gold rose 1 percent to US$1130 per ounce.

The rise in the dollar this morning reversed the losses seen yesterday following the release of the latest New Zealand growth figures.

Statistics New Zealand said the economy grew 0.4 percent in the June quarter. That was an improvement over the 0.2 percent increase seen in the March quarter. But it was less than the 0.5 percent figure that economists had been expecting and the Reserve Bank's prediction of 0.6 percent.

Gross domestic product is growing at 2.4 percent annually. That is below the 2.5 percent prediction in a recent Reuters poll. It is also down from annual growth of 2.7 percent in the March quarter.

The New Zealand dollar was trading at 63.89 by 8am.

It was sitting at 88.58 Australian cents.

The Kiwi was buying 55.78 Euro cents, 76.35 Yen and 40.81 Pence.

The Trade Weighted Index was 68.53.

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