Dow drops on Fed decision not to raise interest rates

Federal Reserve Chairman Janet Yellen

NEW YORK – Following the Federal Reserve's announcement Thursday afternoon that it had decided not to raise its key interest rate, the Dow went through a wild 250-point swing, uncertain whether the decision was good news or bad.

The Dow closed at 16,674.74, down 65.21 points.

The 194-point rise in the Dow immediately after the Fed announcement suggested investors were interpreting the decision as a sign that continued near-zero interest rates would keep enough liquidity in the market to trigger a rally after the selloff that followed China’s decision Aug. 11 to devalue the yuan 3 percent.

But the swing to a loss of 65 points at the close indicated concern that the Fed’s decision was a sign the U.S. economy has become a hostage to the global economy, so that even a quarter-of-a-percent rise in interest rates could trigger a deeper selloff in the Dow.  Already, the slowdown in the Chinese growth rate has triggered fears the U.S. economy could slip back into recession without continued monetary stimulation by the Fed.

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The widely read financial blog ZeroHedge.com noticed a shocker in the Federal Reserve’s Federal Open Market Committee discussion.

For the first time ever, one member of the FOMC actually suggested the U.S. needs to move to negative interest rates, at least until the end of 2016, to achieve full employment and hold inflation at the 2 percent target.

With negative interest rates, financial institutions would start charging customers a fee to keep money on deposit instead of paying them interest.

John Williams, author of the financial blog ShadowStats.com, wrote in his subscription newsletter published immediately after the Fed’s interest-rate announcement that the attention of market analysts will now turn to divining the Fed's rationale for its decision.

What economic circumstances were sufficiently scary for the Fed to back off from raising its key interest rate 25 basis points at the meeting that concluded Thursday?

One week ago, Williams wrote that if the Fed does not raise the rate, it will not be due to "economic weakness."

"It will be because the Fed still deems the post-2008 financial system to be too fragile and vulnerable, unstable," Williams wrote.

In his Sept. 11 newsletter, Williams warned that a day or two following the FOMC meeting, market reaction "could be even more-violently negative than anticipated with a rate hike, if the central bank does not act."

Fed begged by IMF and World Bank not to raise rates

With today’s FOMC meeting being the 55th in a row without an interest-rate hike, Federal Reserve Chairman Janet Yellen noted global economic events may restrain U.S. economic growth, a clear reference to the impact the collapse in the Chinese stock market has had on stock markets around the globe.

On Sept. 9, WND reported the International Monetary Fund in its annual assessment of the economy urged the Fed to delay a rate hike until the first half of 2016.

The same article noted Kaushik Basu, the chief economist for the World Bank, warned the Fed that a decision to raise interest rates now could trigger “panic and turmoil” in emerging markets.

The IMF and World Bank were joined by Deutsche Bank, the European Union’s biggest bank, which warned that a rise in U.S. interest rates now would constitute nothing less than a “premeditated controlled demolition” that could cause global stock markets to collapse a dramatic 40 percent.

The Drudge Report headline on the FOMC announcement Thursday, “Fed Blames World,” linked to a CNBC article that reported, “In the face of jittery financial markets and a global slowdown, the Fed blinked and held its key federal funds rate unchanged.”

Bill Gross, manager of the Janus Global Unconstrained Bond Fund, said he believed that one of the reasons "for not hiking, I think, is that they didn't want to continue to increase the strength of the dollar, which would reverberate back into the United States."