Fed making a 'mistake' on rates, says AB

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The US Federal Reserve has made a mistake by leaving interest rates on hold in September, echoing its decision not to taper its bond purchasing program in September 2013, says AllianceBernstein (AB).

The September 16-17 Federal Open Market Committee (FOMC) meeting saw policymakers vote 10 to one to leave official rates unchanged at 0-25 basis points.

In a note to investors, AllianceBernstein US economist Joseph Carson said the Fed decided to delay the normalisation of official rates due to "global financial and economic uncertainty which, in its view, temporarily overshadowed stronger labour markets and a better-than-expected domestic economy".


"Policymakers still expect a rate hike before year end, but it’s hard to gauge what would compel them to act, since they keep modifying their reasons and, thus, moving the goal posts," Mr Carson said.

Fed chair Janet Yellen has left the door open for a rate increase during the FOMC meeting on 27-28 October, declaring the meeting 'live' even though it won't be followed by a press conference.

"We think the odds of that occurring are extremely low. Such a quick U-turn in the policy decision would certainly hurt the credibility of policymakers," Mr Carson said.

"But more importantly, a near-term rate hike would definitely be a surprise to the financial markets and trigger increased volatility – something that influenced the Fed’s decision to delay any rate move this month," he said.

Mr Carson questioned whether FOMC decisions are truly 'data dependent' – something that policymakers, especially Ms Yellen, have long argued.

"It seems to us that a data-dependent policy is only credible if you follow it, instead of making detours when the tough decisions are at hand," he said.

"We think policymakers are making a mistake similar to their decision not to taper their bond purchasing program in September 2013."

Just as in the second half of 2013, the risk is that the economy will advance soundly and the jobless rate will be "at or below five per cent", he said.

"And starting from a position of a near-zero federal funds rate, policymakers will need to play catch-up – something Yellen said she was trying to avoid," Mr Carson said.


Fed making a 'mistake' on rates, says AB
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