Federal Reserve Makes Murky Situation Even Murkier

By Economic IndicatorsFOXBusiness

The Federal Reserve’s decision Thursday to delay raising interest rates could make an already-murky situation even more unsettled.

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That’s the assessment of a number of analysts who believe the Fed has likely exacerbated the strong sense of uncertainty that has permeated markets in recent weeks and contributed to high levels of volatility.

“Things are less certain,” Carl Tannenbaum, chief economist for Northern Trust in Chicago, said shortly after the central bank announced it would keep interest rates at the near-zero range where they’ve been held since December 2008.

One reason widely cited in support of raising rates ahead of Thursday’s decision was to provide some sense of clarity as to when U.S. monetary policy would start returning to normal after seven years of easy money stimulus policies.

Tannenbaum said he expected the Fed’s September statement “to be a little more instructive on when they might raise interest rates.” But that wasn’t the case.

Instead, much of the new language in the statement released Thursday focused on uncertainty brought about by recent turmoil in global markets – namely, fears that China’s economy is slowing – which raises the possibility that those troubles may be more worrisome than initially believed.

So instead of providing clarity to the Fed’s future plans, the statement only heightens the sense of uncertainty regarding when the Fed might start raising rates, Tannenbaum said.

“What seemed highly likely -- basically a binary decision, a rate hike in either September or December -- is now not so certain,” Tannenbaum said.

In its statement, the policy-setting Federal Open Market Committee maintained its prior guidance, saying its first interest-rate increase will come after “some further improvement in the labor market” and when officials are “reasonably confident” inflation will move back to the central bank’s 2% annual target.

That’s essentially the same language the Fed has been using for months in its efforts to prepare markets for an eventual rate hike. By not changing the language, it leaves investors wondering what criteria or benchmarks the Fed is using to determine the proper timing of a rate hike.

Fed Chair Janet Yellen in her press conference following the release of the statement stressed that “the great majority” of Fed economists still believes rates will move higher “by the end of this year.”

Responding to a question about ongoing turmoil in global markets that could impact future Fed policy, Yellen conceded “we can’t expect that uncertainty to be fully resolved.”

Consequently, the Fed chose to take more time to determine how that turmoil may impact U.S. markets.

In other words, improved clarity isn’t likely on the horizon.

David Kelly, chief global strategist J.P. Morgan Funds, predicted ahead of the Fed’s announcement that delaying liftoff would add to market uncertainty.

“Raising rates today would reduce uncertainty as investors will be able to predict Fed action based on economic improvement. If they don't raise rates it will be because they have added "calm markets" to their criteria and there is no way of knowing, months ahead, when markets will be calm,” he said.

Former Philadelphia Fed President Charles Plosser made similar comments earlier Thursday in an interview on the FOX Business Network.

“I think one of the sources of volatility is the uncertainty that monetary policy is providing and the guessing.  And if you don't act today, the Fed doesn’t act today, one of the risks they run is that volatility is going to continue,” Plosser said.

“There’s going to be now guessing will they do it in it October?  Will they do it in December?  You just keep feeding the frenzy of the uncertainty, and resolving that uncertainty, at least getting the first rate hike out of the way.  Because what’s really going to be important is what happens after that,” he added.

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