After much anticipation the US Federal Reserve maintained interest rates yesterday at a record low of 0%-0.25%. The probability of a rate rise had fallen substantially to around 30% as indicated by options known as Fed Futures, but still the market was nervous of the Fed’s decision and the statement which would accompany it.

The Fed recognised that the US economy continues to add steady job gains, household spending remains robust and the general outlook for US economic activity remains positive. Of greater concern however were events around the world. Quoting Janet Yellen, chairwoman of the Federal Reserve, “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term”. Reference was being made to the latest concerns regarding Chinese economic growth and their stock market, which has spilled over into emerging markets generally. They were also cognisant of the many geopolitical risks around the world.

The US also continues to grapple with low inflation. In their latest forecast they now believe that it will be 2018 before they reach their 2% target. The Fed’s preferred inflation measure, the personal consumption expenditure price index (PCE), remains low at only 0.3% for the 12 months to the end of July. This index has now run below target for more than three years.

The dovish nature of the statement following the announcement of the decision has seen expectations of a future rate hike pushed back. Futures now suggest that there is now only a 23% chance that there will be an increase in October, a 49% chance by the December meeting and 56% at the January meeting.

US equity markets ended the day slightly lower whilst there was a rally in short dated government bond prices which are sensitive to changes in interest rates.