The Wild Day That Wasn't: Fed Avoids Tumult But Prolongs Uncertainty

Thursday could easily have been a wild day on Wall Street.

If the Federal Reserve, at a long-anticipated meeting, had decided to raise interest rates for the first time in nearly a decade, a steep sell-off in the stock market was possible. Conversely, if the Fed kept rates at their ultralow levels, investors might have cheered its commitment to easy money and gone on a buying spree.

In the end, the Fed chose not to raise rates. Unexpectedly, the market closed slightly lower. The muted reaction may be welcome after the turbulence that roiled stock markets last month. And since investors were betting in certain markets that the Fed would not raise rates, it made some sense that they did not react strongly when they got what they expected.

But the stock market's apparent meekness on such a big day may not be as encouraging as it looks. The Fed's decision not to raise rates, combined with statements made by Fed officials on Thursday, may have deepened investors' fears about the strength of the global economy - and raised new questions about the Fed's ability to respond to weakness around the world.

"What was problematic is that the Fed introduced a greater measure of concern about global issues," said Jorge O. Mariscal, chief investment officer for emerging markets at UBS. "The markets might be saying, 'What does the Fed know that we don't know?'"

The broader Standard & Poor's 500-stock index finished the day down just 5.11 points, or 0.26 percent, at 1,990.20. The Dow Jones industrial average, which was up as much as 194 points on Thursday afternoon, closed down 65.21 points, at 16,674.74. The tech-heavy Nasdaq composite index ended the day on a higher note, up 0.1 percent, to 4,893.95.

Investors sought the safety of government bonds. The yield on the 10-year Treasury note, which moves in the opposite direction to its price, fell to 2.217 percent, from 2.3 percent. The yield on the two-year Treasury plunged to 0.68 percent, from 0.81 percent.

Expectations about Fed policy have long driven investors' decisions. But the influence of the Fed grew after the central bank introduced an enormous stimulus program after the financial crisis to lift the economy. Even though the economy did not bounce back strongly, investors were encouraged that the Fed would keep printing money until it got the results it was looking for. And with the Fed holding rates at their lows on Thursday, investors would seem to have reason to believe that stocks will keep moving higher as the Fed keeps its foot on the pedal.

Inflation is well below the Fed's target in the United States, giving it some reason to delay raising rates - maybe even into next year, although it will have two more opportunities before this year ends. Whatever the precise timing, the Fed also appears to believe that with large developing countries like China flashing signs of weakness, it should keep rates at low levels to try to ease global financial conditions and insulate the United States economy from trouble overseas.

One part of the statement released by the Fed's monetary policy committee in particular indicated that higher rates might be a long time coming. "The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term," the statement said.

But the Fed's decision to hold off could be self-defeating. It might stoke fears rather than allay them, according to some analysts. And investors may start to believe that the Fed is in effect trying to set monetary policy for both the economies of the United States and China. That might be hard to pull off.

"China is now the Fed's reaction function," Mariscal said. "It's another source of uncertainty."

Janet L. Yellen, the Fed's chairwoman, on Thursday appeared well aware of the difficulty of reacting to many different forces in the world economy and in global markets. She emphasized the existence of "crosscurrents" in a press briefing.

Some Fed watchers in the markets said that the Fed should have raised interest rates on Thursday - to dispel the uncertainty that they believe the central bank has started to create in the markets. Because it chose not to raise rates on Thursday, investors will be fretting for months about when the big day will actually arrive. "It leaves you no different than you were one minute before the announcement," said James W. Paulsen, chief investment strategist at Wells Capital Management. "My countdown clock just restarted for 30 days."

But raising rates could have created far greater uncertainty, by roiling markets and hammering developing countries when they are vulnerable. Or, as Yellen put it, "Given the significant economic and financial interconnections between the United States and the rest of the world, the situation abroad bears close watching."