Yesterday, the Federal Reserve left rates unchanged citing recent market volatility and global events. In its official announcement, the Fed stated “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”…and that “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.” The statement about global events is interesting since global financial and economic conditions are not part of the Fed’s dual mandate. In the past few months a number of international bankers, including Christine Lagarde, Managing Director of the IMF, have implored the Fed to leave rates alone, but international concerns are not the responsibility of the Federal Reserve. The Fed has two goals: to maintain price stability and support maximum employment. Introducing another mandate will make their job even more difficult. Now, the decision to raise rates is off the table until their next meeting in October or the following meeting in December.
As a result, 10 year yields on sovereign bonds around the globe were down about 10 basis points. Equity markets, here and abroad, took the Fed’s decision as a sign that corporate earnings could be hurt by weak global growth and sold off today.
Because of the recent volatility in global markets, investors had already lowered their expectations of a Fed increase; however, by leaving rates unchanged markets are filled with a sense of unfinished business. We expect volatility will remain elevated as the market tries to gauge the continued uncertainty. While the coming weeks could remain interesting, the short-term abberations should not discourage investors from reaching their long-term goals.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Washington Trust Bank.