Stocks Under Pressure Following Fed Rate Decision, Uncertainty About Inflation and China

dailWritten by: Johnathan Schweitzer

U.S. stock futures are plunging on Friday following yesterday’s decision by the Federal Reserve to hold back on raising interest rates with the federal funds which are just above zero due to concerns about inflation remaining well below the Fed’s 2 percent objective for a longer stretch of time along with weaker global growth.

Although U.S. GDP is estimated to have expanded at a 2 1/4 percent pace in the first half of 2015, a stronger pace that was expected at the Fed’s June meeting when committee members last submitted economic projections, inflation is expected to remain low in the coming months, reflecting lower energy and non-energy import prices, and the outlook is more uncertain due to heighten concerns about China and other emerging economies.

“Developments since our July meeting, including the drop in equity prices, the further appreciation of the dollar, and widening in risk spreads, have tightened overall financial conditions to some extent” said Fed Chair Janet Yellen during yesterday’s press conference.

“These developments may restrain U.S. economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Given the significant economic and financial interconnections between the United States and the rest of the world, the situation abroad bears close watching” Yellen added.

Yellen provided an explanation for lower federal funds projections that includes “residual effects of the financial crisis, which are likely to continue to constrain spending for some time, as well as headwinds from abroad.”

Many Fed committee members have lowered their paths for the federal funds rate, including longer run estimates.

“Most participants continue to expect that economic conditions will make it appropriate to raise the target range for the federal funds later this year, although four Fed members now expect that such conditions will not be seen until next year or later” Yellen admitted.

-Johnathan Schweitzer    -schweitz31@gmail.com

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