US Federal Reserve keeps interest rates unchanged

The US Federal Reserve kept interest rates unchanged following its two-day policy meeting on Thursday, as it lowered its estimate of the economy's potential rate of growth and said it was monitoring "developments abroad".

The target range for overnight interest rates or the so-called Fed funds rate was maintained at between 0.0% to 0.25%.

On average, Thursday’s decision had been anticipated by traders in financial markets, as reflected by the Fed funds futures market, although some economists had held out in predicting a rate rise.

Following the announcement and Fed chair Janet Yellen’s press conference, Fed funds futures were left pricing in a 50/50 chance of a December 2015 interest rate hike and just a 57% chance of an increase going ahead in January 2016.

"Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near-term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace [...]

"The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad," the FOMC's policy statement read.

The outlook for US policy-making will no doubt fuel further volatility

“The decision will be seen by many as appropriate. [...] But the lack of action leaves lingering uncertainty about the outlook for US policymaking, which will no doubt fuel further volatility in the markets," Chris Williamson, chief economist at Markit said to clients in an e-mail.

The yield on the policy-sensitive two-year US Treasury note saw its largest decline since March after the decision, retreating by 12 basis points to 0.69%.

October Fed meeting still in play

In her press conference, Yellen emphatically said the Fed had not suddenly turned “significantly less confident” and the result of Thursday's FOMC meeting should not be interpreted as such. Furthermore, an October rate hike was still a possibility, she said.

"We want to take a little more time to assess the recovery."

We want to take a little more time to assess the recovery

Indeed, the policy statement referenced “solid job gains and declining unemployment” and reiterated that “economic activity will expand at a moderate pace”.

However, FOMC members also lowered their long-term inflation projections and their estimate of the potential rate of growth of the economy.Likewise, in their latest set of macroeconomic projections US rate-setters kept the possibility of one rate rise in 2016 ‘on the table’.

The latter was lowered to between 1.8% and 2.2%, down from the central tendency forecast put down in June of between 2% to 2.3%.

Responding to one journalist’s query regarding whether that was not a contradiction of sorts, Yellen explained that to not keep the door open to tighter policy soon could still lead to undershooting FOMC members' unemployment forecasts and overheating the economy.

Economic policy should not be conducted in a ‘stop-and-go’ fashion

"Economic policy should not be conducted in a ‘stop-and-go’ fashion", Yellen said.

Will the Fed ever be able to 'exit' its loose policy?

Lastly, another journalist asked America’s top monetary policy maker whether she though the fed would ever be able to ‘exit’ from its loose policy. Yellen said her conviction was that such scenarios were too extreme.

There was one dissenter from Thursday's FOMC decision, the president of the Federal Reserve bank of Richmond, Jeffrey Lacker.

Lastly, another journalist queried Yellen about whether the Fed was not just slavishly following markets' guidance.

She retorted that it was "incumbent" on policymakers to ask what was behind the gyrations in markets.

"It is not implausible that some other "risk" will emerge over the next few months (the debt ceiling is the most obvious candidate) that will convince the Fed to delay even longer," Paul Ashworth, chief US economist at Capital Economics said in a research note e-mailed to clients.