David Fuller's view

The Federal Reserve would like to be focussing entirely on the US economy but it is clearly concerned about international events, including: 1) China’s economic problems; 2) borrowings of US Dollars by a number of emerging economies which could be in further trouble if the greenback appreciates further; 3) quantitative easing from the Eurozone, Japan and other countries which adds to upward pressure on the US Dollar; 4) which increases the headwind for earnings of US international corporations; 5) which keeps the US economy soft and risks deflation.

The US has successfully lowered unemployment to 5.1% but concern over the quality of jobs remains, plus job loses in the energy sector which had been the strongest area of employment before crude oil prices plummeted in the second half of 2014.

However, the most important number mentioned by Janet Yellen was the Fed’s 2% inflation target.  This is nowhere in sight due to the weakness of oil prices and other commodities, plus slow global GDP growth.  There is also the positive disinflationary impact of rapid technological innovation which the Fed did not mention. 

The Fed has clearly decided to err on the side of caution.  There was no hint of a rate hike later this year, as most people had expected.  Janet Yellen does not want to repeat the cycle of higher rates in 1999 and 2006 which preceded two severe bear markets.  The emphasis on an inflation target of 2% suggests that US rates will remain on hold for at least the lengthy medium term. 

Meanwhile, stock markets do not emerge from this period of seasonal underperformance, on average, until the end of October.  Investors will be weighing relief that the cycle of rate hikes has been postponed, against concerns over weak global GDP.  However, monetary policies remain generally stimulative and valuations have been lowered by the recent corrections.  There are plenty of worse environments for equities.   

(See also: Yellen’s Decision to Delay Fed Liftoff Points to Global Risks, from Bloomberg and also: Stocks Fall as Fed Leaves Interest Rates Unchanged, from The Wall Street Journal)