Why Fed Decides Not to Increase Interest Rate


In the month of September 2016, the STI (Straits Times Index) was on a roller coaster ride. The chart below shows the STI trended down in the week of 12th to 15th September 2016 before resuming the uptrend.

I read in the news that the Fed will be holding the Federal Reserve Meeting on 21st September to decide on the interest rate hike. The speculation that Fed will raise interest rates has caused uncertainty in the stock market.

Straits Times Index September 2016

During the Federal Reserve meeting on 21st September 2016, the Fed has decided not to raise the interest rate. The stock market (STI and US stock market) went on an uptrend again.

What are the reasons Fed decided not to raise the interest rate at this point?

1. Poor Economic Data

The employment report for August was weaker than expected. Job growth fell and wage growth was slowest since March. ISM Non-manufacturing Index (ISM services index) was 51.4 for August. This is the lowest since February 2010. This shows that the economy has not recovered and thus post a risk if Fed raise the interest rate, the economy can fall back in recession.

2. Spike in 3-month LIBOR

There was a spike in 3-month LIBOR. The spike represents a tightening in financial conditions. In short, LIBOR is the rate banks lend to each other for 90 days. LIBOR is used as a benchmark for floating rate loan products for both consumer and businesses.

LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. – Investopedia

3. Presidential Election

We all know about the presidential election in the United States between Donald Trump and Hilary Clinton. According to the votes, Donald Trump is leading by 2% ahead of Hilary Clinton. It was believed that if Donald Trump wins the presidential election, it will destabilize the markets. The decision not to raise interest rate was to reduce the impact to the economy in the event Donald Trump really wins the presidential election.

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