In a decision that could have gone either way, the Fed decided not to raise its key interest rate in September. America's central bank hasn't raised interest rates in almost a decade and rates are stuck near zero since the depths of the financial crisis in December 2008.
The key concerns about a global economic slowdown coupled with low inflation in the U.S and volatile stock markets lowered the chances of the rate hikein the month of September. However the majority of the Fed committee members believe that there will be a rate hike in 2015. The chairman emphasized that every meeting is a live meeting and a rate hike in October is a possibility. However, in deciding when to hike rates, the Fed repeated it wanted to see some further improvement in the labour market and wanted to be reasonably confident regarding an increase in inflation.
The committee stated that it will be appropriate to raise the interest rates once they see some further improvement in the labour market. A lot of economists from chiefs of International Monetary Fund (IMF) and World Bank had urged the Fed, not to raise the rates in September.
What will be the impact of a rate hike by Fed on India? An increase in the interest rate by Fed, will result in an outflow of money from Foreign Institutional Investors (FII). The interest rates have a direct correlation with the bond yield rates. Thus a hike in the interest rates by FED will lead to an increase in the bond yield rates, subsequently resulting in FIIs to shift their money to the US treasury bonds. To add to this, as the gap between US and Indian interest rates further narrows, more FIIs would pull money out of India. As was reported recently, FIIs pulled out as much as Rs 27.90 bn (equities only) in the month of September 2015 so far.
However, long term investors need not lose sleep over such matters. It is exactly such events that provide opportunities to buy great businesses at good prices. If the Indian markets were to fall significantly due to this event in future, we at Equitymaster will be quite happy to recommend solid stocks for the long term.