To anybody who has been following financial news for any length of time, the “news” that the US Federal Reserve intends to follow a patient approach to raising interest rates does not qualify as news at all. The Fed under Ben Bernanke and now under Janet Yellen had made no secret of the fact that interest rates would stay unchanged whilst the US economy continued to recover. They both, in their turn, stressed that when interest rates do rise, they will do so gradually and with a careful eye on their effects on the economy – meaning it will take a considerable time before they return to their historic average level; a shade over 6% (from 1971 to date). Therefore, the “news” that interest rates will stay on hold until April 2015 will only come as a surprise to those who thought that a longer hold would be announced, given the fact that global demand has been weakening for some months now.
However, news of the Fed’s position when it emerged following their 17 December meeting was credited with pushing up US stocks with the Dow Jones Industrial average making nearly 300 points (about 1.7%). The interest rate stayed unchanged at 0.25% where it has been since December 2008 (short term interest rates remain near zero). The Federal Reserve ended its asset purchase scheme in October, phasing it out over a ten month period to avoid any unnecessary shocks to the economy. A gradual approach to interest increases, but over a much longer time base of several years, is to be expected. Analysts are anticipating that the rate may start to edge upwards from the middle of next year.
The Fed’s “decision” was also credited with boosting stock markets in Asia. Ms Yellen suggested that the Fed would not raise rates other the next couple of meetings, suggesting that rates won’t rise until late March at the earliest, but she made no promise of a hike even then.