Fed decision gets muted reaction in emerging markets

ANKARA

Reaction to the U.S. Federal Reserve's announcement to hold interest rates was muted on Friday, as emerging-market stocks and indexes changed little.

Investors are clearly taking time to digest the Fed's move. Glen Stevens, governor of Australia's central bank, the Reserve Bank of Australia, expressed concern about the Fed's move in his speech to the national parliament on Friday.

"The more important factor will be the pace of subsequent increases. The Federal Reserve has indicated this is expected to be very gradual, but of course that will depend on what happens with the U.S. economy. There is a degree of irreducible uncertainty here and hence the possibility of further financial market volatility at some point," Stevens said.

Traders expressed the same kind of uncertainty on the markets on Friday.

The MSCI Index of Emerging Market stocks jumped 2 percent after the announcement, but then fell back to a flat 0.6 percent rise later. Asian stocks were flattish and mixed: Japan's Nikkei was off 1.42 percent; China's Shanghai Composite index saw a slight rise at 0.4 percent; Hong Kong's Hang Seng was flat with a 0.42 percent increase, and Australia's ASX200 gained 0.83 percent.

European stock index futures pointed to a slightly lower open in Paris and Frankfurt.

The Turkish lira has held at about 3 to the dollar. The euro rose slightly to about 1.14 to the dollar, after the announcement.

On Thursday, the Fed announced it would hold rates at near-zero levels. After the announcement, Federal Reserve Chairwoman Janet Yellen said in a speech: "In light of the heightened uncertainties abroad, and the slightly softer expected path for inflation, the committee judged it appropriate to wait for more evidence, including some further improvement in the labor market, to bolster its confidence that inflation will rise to 2 percent in the medium term".

Yellen specifically cited financial volatility in China as a concern. It was the first time that the Fed has ever made reference to conditions outside the U.S. in comment on an interest-rate decision.

"The Fed finds itself in a battle with deflation," Lombard Street Research economist Dario Perkins said in a note sent to Anadolu Agency after the announcement. "So, even a small hawkish move could have outsized repercussions. Any severe bout of volatility in financial markets could have real consequences, especially if it damaged wealth or disrupted business investment".