Federal Open Market Committee Made the Correct Decision

Peiqi Zhou

Professor Spieler

FE442

September 27, 2015

Federal Open Market Committee Made the Correct Decision

        The Federal Reserve made the decision to leave interest rates unchanged on September 18, 2015. I believe that it was the correct decision to keep the federal funds rate unchanged. According to the FOMC meeting transcript, although the paces of job gains are solid, the unemployment rate is still not at the Fed’s target of maximum unemployment. In addition, we are currently below the target inflation rate of 2%. Other than these two major factors the FOMC members are considering, I believe the strengthening dollar and the Chinese stock market are two causes of concern.

        Throughout the summer, the dollar has been gaining strength relative to other currencies. For example, the USD has been appreciating compared to the CAD from around 1.20 at the beginning of summer to 1.33, as of 9/27. With a strengthening dollar, our net exports will decrease due to the higher costs in the U.S dollar. Similarly, U.S. firms such as Apple and Google will see revenue decreases in overseas markets due to currency fluctuations. Another cause of concern is the volatility of the Chinese stock market. Throughout the summer, Chinese stock markets have gained nearly 10% every single day, with the Shanghai Composite jumping from around 4,000 to 5,000 within a few summer months. Towards the end of the summer, the Chinese stock market dropped erasing the gains of 2015. The losses at some points were in bear market territory, which is a drop of more than 20%. Currently the Shanghai Composite is at 3086 as of 9/27. This volatility had major effects on global markets, one of which being the U.S. stock market. On August 25th, the Dow Jones Industrial Average dropped over 1000 points in response to the Chinese markets.