The Federal Reserve Bank of the United States left its short-term benchmark interest rates unchanged, at least for now. It has recently been painting a rosy picture of the American economy—with improving job reports, and an inflation rate that remains below its target of 2.0%, Normally, that scenario would justify higher rates, which it had previously suggested might be coming soon. But, I believe that the Fed decided to wait, however, due to considerations about continued weakness in the global economy.
Last month, following the “Leave” vote in the United Kingdom, there was considerable volatility, not only in Europe, but globally, as most financial markets slid dramatically. The uncertainty surrounding the “Brexit” was due to the fact that no country had ever left the E. U. before. And, it might not be the last nation to do so! It’s important to note also, that Europe represents approximately 25% of the global economy. Two days later, however, global stocks rebounded, and some—even the U. K—surpassed their pre-Brexit levels.
Many currencies also declined, versus the U. S. Dollar; but, they have not rebounded. And, interest rates on the sovereign debt of many nations have dropped as well, which generally signifies weaker economies. I believe that the hesitancy of the Fed, to raise rates by just 0.25%, to a range of 0.50% to 0.75%, is due to the potential impact on global capital flows. A hike by the Fed at this time could strengthen the dollar by attracting potential foreign capital flows away from weaker economies, just when they need them most—to re-build.