Analysts at Regency Associates say that the Federal Reserve’s failure to raise interest rates at last week’s highly-anticipated meeting of the FOMC (Federal Open Market Committee) has damaged the central bank’s credibility.

For much of 2015, the Fed and the various individual voting members of the FOMC have issued statements and given interviews that have raised expectations for the start of normalization of interest rates after nearly 7 years at zero.

“Fed Chair, Janet Yellen and many of the other voting members have spent the last 12 months telegraphing their intention to begin tightening monetary policy and then, at the last minute, they’ve blinked. To be fair, though, we don’t think it was the decision itself that was unexpected since only a third of analysts and economists expected a September hike; it was the reasons given for the decision that have raised some many eyebrows,” said Shem Orbison, chief economist at Regency Associates.

The Fed said that economic problems and market turbulence in emerging markets meant that raising rates would have been inappropriate. The language was generally regarded as the Fed voicing concern about the slowdown in China, the world’s second biggest economy.

“We expected a hold but with some hawkish language to leave everyone in no doubt that the Fed would be hiking soon but what we got was a hold with extremely dovish language suggesting that only when China resolves its economic situation, will rates be hiked. That could take a long time,” said Orbison.

Regency Associates says it is positioning clients for a weakening of the US dollar and a strengthening of emerging market currencies as well as betting on another round of QE from the Bank of Japan.

About Regency Associates
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