Industry watchers can finally heave a collective sigh of relief after the Federal Reserve ended weeks of speculation this week by keeping interest rates at record lows in the wake of weak global economic conditions and choppy financial markets.
Maintaining its policy, the Fed has decided to keep its benchmark short-term rate near zero, where it has been since the financial crisis of 2008.
Florian Lelpo, Unigestion’s head of macroeconomic research, noted this week that there are two factors that could lead to the Fed’s decision to keep rates on hold over the remainder of the year.
“First, the China-led emerging market slowdown is perceived by some as likely to be strong enough to bring the US to the brink of another recession. Second, the fall in energy prices has put US capital expenditures in danger: the US has invested a lot in its shale oil industry, and with the price of oil close to $40 per barrel, many producers are bleeding cash,” Lelpo said.
But Lelpo also noted that these are temporary factors, and that the Fed is likely to hike interest rates by the end of the year – although probably later rather than sooner.
Lelpo added that it is likely that the price of oil will influence the Fed’s decision-making process, moving into the fourth quarter of this year. Since the Obama administration decided in 2011 that the US needed to be self-sufficient when it comes to oil, the country has invested heavily in the sector.
“Communication will be key for the Fed: it will not want to surprise the markets, so it needs to organise its communications very smoothly,” Lelpo said.
