The US Federal Reserve Thursday announced that the federal funds rate will stay unchanged considering the weak global economy and low inflation.
The Federal Reserve said that the economic picture in the United States looks pretty good with solid job gains. However, US Federal Reserve chief Janet Yellen expressed concerns about events happening in emerging markets including China, and highlighted that that could have an impact on the U.S. economy.
For months Wall Street has been speculating on whether the Fed would raise a key interest rate in September.
Reaction of the stock market in the United States was initially positive, but by closing major indices ended lower.
"I think overall when they sit down and look at it, I don't think they're going to be happy. I think they wanted clarity, they wanted some sort of, you know, it's inevitable. I think it should happen. I think it should have happened last year," said Peter Costa, president of Empire Executions, a privately-held company that provides broker-dealer services.
Economists seem divided on the issue. Former treasury secretary Larry Summers and Christine Lagarde, managing director of the International Monetary Fund (IMF), have advised against a hike, but other noted economists think the economy can handle a hike.
Investors in the U.S. stock market have benefited tremendously from low rates. When rates are low, it is cheaper for companies to service their debt and investing in capital makes them more profitable.
When other assets like treasuries and bank deposits have low yields, more people are willing to invest in riskier assets like stocks, which also helped fuel the market.
It is no surprise then that the mere mention of a potential rate hike has traditionally caused the markets to trade lower. But after nine years of rates at near zero, a rate hike could be positive for the market as it could signal confidence in the U.S. economy.
"But the real question is when we get back to higher interest rates, how is the market going to be effected and how is the economy going to be effected. And I think that's why the Fed has played such a slow stance on this because they don't feel that our overall market and our overall economy is ready for that step just yet," said Jonathan Corpina, senior managing partner of Meridien Equity Partners, an independently owned Wall Street brokerage firm.
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