Fed holds fire: Global markets surge

Federal Open Market Committee (FOMC) maintained status quo as it held interest rates steady in line with expectations, followed by a dovish commentary, and substantially scaled back its expectations for further moves going ahead, on Wednesday.

U.S. Central Bank at its December meeting had projected four rate hikes in 2016; new estimates released on Wednesday reduced that number to two. Fed officials also clarified that their expectations for economic growth and inflation for the future had diminished. The current interest rate target is 0.25 to 0.5 percent; and Fed officials back in December had expected the upper level to rise to 1.4 percent by year's end. With the new projections, the FOMC now sees just a 0.9 percent funds rate in 2016; and a 1.9 percent level by the end of 2017, both reflective of cuts pertaining to half a percentage point.

Accounting for global uncertainty the Fed also cut its GDP  growth outlook for 2016 from 2.4 percent to 2.2 percent; and reduced 2017's call from 2.2 percent to 2.1 percent. In the statement, the committee referenced "global and financial developments (that) continue to pose risks," a verbiage that is in stark contrast to the December statement, which said the committee was only "closely monitoring" those conditions.

Central Bank currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labour market indicators will continue to strengthen. However, global economic and financial developments continue to pose risks. Inflation is expected to remain low in the near term. The Committee continues to monitor inflation developments closely. The stance of monetary policy remains accommodative, thereby supporting further improvement in labour market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.

On the future course of action FOMC indicated that they would be keenly assessing a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

U.S. stocks rallied after the Federal Reserve left interest rates unchanged and signalled towards further gradual increases in the coming future. The  Dow Jones industrial average   finished up about 74 points, or 0.4 per cent. The Standard & Poor's 500 gained 0.6 per cent and the Nasdaq composite ended up 0.8 per cent.

Asian shares gained across the spectrum on Thursday after Federal Reserve reduced the number of interest rate hikes expected this year to two. Japanese Nikkei  surged 1.4 percent in trade. Australian stocks added 0.8 percent. South Korea's KOSPI  rose 1.2 percent; and Chinese CSI3000 gained as much as 0.64 per cent.

Domestically too Indian markets gave a thumbs up to the FOMC decision of holding the interest rate hikes. Major benchmark indices Nifty50; and Sensex gained 0.80 per cent; and 0.70 per cent respectively.