The Federal Reserve is keeping US interest rates at a record low in the face of threats from a weak global economy, persistently low inflation and unstable financial markets.
Ending a highly anticipated meeting, Fed officials said that while the US job market is solid, global pressures may “restrain economic activity” and further drag down already low inflation.
Signs of a sharp slowdown in China have intensified fear among investors about the US and global economy. And low oil prices and a high-priced dollar have kept inflation low.
Before the year’s end, many analysts still expect the Fed to raise its key short-term rate, which it has kept near zero since 2008. A higher Fed rate would eventually send rates up on many consumer and business loans.
“All this really does is punt,” said Scott Clemons, chief investment strategist for Brown Brothers Harriman’s private banking business.
Clemons said he expects the Fed to raise rates before the end of the year, especially if concern in the financial markets about China’s economic prospects eases.
“The Fed is paying attention to what is going on abroad,” he said. “That’s all code for China.”
Stock prices barely moved after the Fed’s decision was announced but bond prices rose, and yields fell.
Financial markets had been zig-zagging with anxiety as investors tried to divine whether the Fed would start phasing out the period of extraordinarily low borrowing rates it launched at a time of crisis.
The Fed’s action was approved on a 9-1 vote, with Jeffrey Lacker casting the first dissenting vote this year. Lacker, president of the Fed’s Atlanta regional bank, had pushed for the Fed to begin raising rates by moving the federal funds rate up by a quarter-point.
Instead, the Fed retained language it has been using that it will be appropriate to raise interest rates when it sees “some further improvement in the labour market” and is “reasonably confident” that inflation will move back to the Fed’s optimal inflation target of 2%.
The Fed’s preferred measure of inflation was up just 1.2% in the latest reading and has been below 2% for more than three years.
In an updated economic forecast, 13 of the 17 Fed policymakers said they see the first rate hike occurring this year. In June, 15 Fed officials predicted that the first rate hike would occur this year. The forecast also reduced the number of rate hikes this year to show an expectation of just one quarter-point increase, rather than two that had been the expectation at the June meeting.
The new forecast significantly lowered the expectation for inflation this year to show the Fed’s preferred inflation gauge rising just 0.4%, down from a 0.7% forecast in June. The change takes into account the further rise in the value of the dollar, which makes imports cheaper, and a recent drop in oil prices. The Fed’s forecast still foresees inflation accelerating to a 1.7% increase next year, still below its 2% target.
The new forecast has unemployment dropping to 5% by the end of this year, down from 5.3% in June. The unemployment rate in August dropped to a seven-year low of 5.1%.