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Federal Reserve calls timeout on raising interest rates

Interest rates will stay where they are for now, according to an announcement by the Federal Reserve. Jeffrey Brown speaks to Krishna Guha of Evercore ISI about why they came to that decision and what it could mean for the economy.

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    It's been seven years since the Federal Reserve took the unusual step of lowering interest rates to near zero. More extraordinary, rates have not moved up since then.

    For much of this summer, the expectation was that this would be the day that the Fed would announce a change. But, once again, the Fed decided to leave rates where they were.

    Jeffrey Brown picks up the story from there.


    Expectations began to change just weeks ago following market turmoil and worries over China. During a press conference this afternoon, Federal Reserve Chairwoman Janet Yellen spoke of those factors, but also said a hike may still be in the cards.

  • JANET YELLEN, Chair, Federal Reserve:

    Most participants continue to think that economic conditions will call for or make appropriate an increase in the federal funds rate by the end of this year.

    Of course, there will always be uncertainty. We can't expect that uncertainty to be fully resolved. But in light of the developments that we have seen and the impacts on financial markets, we want to take a little bit more time to evaluate the likely impacts on the United States.


    Some insight now into this decision and where the Fed may head soon from a close observer.

    Krishna Guha is the vice chairman of Evercore ISI, an independent investment banking advisory firm. From 2010 to 2013, he served as head of communications at the New York Federal Reserve.

    Nice to see you again.

  • KRISHNA GUHA, Evercore ISI:

    Great to see you, Jeff.


    The Fed did make clear that the recent turmoil in the markets and Europe was a factor here.


    I think that's right, but it's not just so much the turmoil in the markets, per se.

    The Fed is saying is, it looks like the market weakness was driven by concerns about China and the emerging markets. And if that's right, that's something the Fed should be paying attention to, not market volatility from day to day, but concerns about global growth. That's really what they focused on.


    The release today says the Fed is — quote — "monitoring developments abroad." It's a sort of — that bland kind of statement.

    Of course, they're always monitoring developments abroad, but this says they're really watching it and worried.


    It says they're paying close attention to these developments.

    Now, I think one of the reasons why markets, the stock market was a bit jittery today is people were wondering, does the Fed know something we don't? I don't think that's the case. I think they're being prudent. I think they're saying, things look weak in China and other emerging markets, weaker than we thought a few months ago, and the markets are telling us that there may be some problems here, so let's take a short time out at least and evaluate these developments, see what happens. And then we can make a better assessment of what they mean for the U.S.


    Well, a short time out. There were some real divisions that have come out about what happens next. Right? There was a minority, but still a strong minority, suggesting nothing should happen even through — at least through the end of the year.


    So I think — you're, of course, right, and the Fed officials give you their dots, where they think interest rates will go.


    The tally.


    Yes, that's right.

    So, most of them said they still expect to have that hike by year-end. Four are now saying, no, 2016 or maybe even 2017. So I think they're leaning towards December, but they're giving themselves the option to delay if the world looks threatening at that point.


    Is this unusual, in your experience, to have that kind of division vocalized or put down in the tally form?


    You know, not really.

    And I think that's a good thing, not a bad thing, because you don't want group think at a central bank. You want people to have their own perspectives, difference of views. Right now, there is, I think, a fairly cohesive mainstream view that we're getting closer to the point at which the domestic economy will support a rate hike, but it's worth paying attention to these international developments.

    Now, you have some people — Jeff Lacker dissented — who would like to hike today, and you have got a few who are already pushing back into next year, but I think the mainstream is saying, by the end of the year, probably, but we will keep an eye on things.


    But, just briefly, so in the meantime, you do have people breathing a sigh of relief in Europe, that are elsewhere who are looking to the U.S. economy as a driver still.


    Yes to some degree, but it's also the case that, of course, if you're sitting in Europe right now, the fact that the U.S. is not raising rates means the dollar is a bit weaker, means their currency, the euro, is a big stronger.

    And if your economy still has a lot of challenges, like the European economy, you would actually perhaps prefer the Fed was hiking, so your currency would weaken and you would pick up some more trade.


    All right.

    Krishna Guha, thank you so much.


    Thank you.