WASHINGTON: The Federal Reserve held its key interest rate locked at zero Thursday (Friday morning in Manila), pointing to the downturn in the global economy even as US growth remains steady.
But members of the policy-making Federal Open Market Committee made clear, in projections accompanying their announcement Thursday, that they still expect rates to rise by the end of the year.
“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the Fed said.
In a clear reference to the recent turmoil provoked by the downturn in the Chinese economy, the Fed noted that it is “monitoring developments abroad,” even as it said that the risks facing the US economy are still “nearly balanced.”
The Federal Open Market Committee had spent two days discussing whether to undertake the first increase in the benchmark federal funds rate in more than nine years, breaking away from the extremely easy-money policy stance dating to the 2008 financial crisis.
The FOMC nevertheless said that the US economy is motoring on steadily at a moderate pace, with household spending and business investment increasing, and home construction growing faster, but exports “soft”.
One key guide to policy, the strength of the labor market, had improved since the July meeting, it said, with slack diminishing since earlier this year.
However inflation, another prime input into policy decisions, had weakened, though it blamed that in part to “the transitory effects of declines in energy and import prices.”
The FOMC said it expects the US economy to expand by 2.1 percent this year but lowered its forecast for 2016 to 2.3 percent, from 2.5 percent estimated in June.
It also slightly lowered its forecast for inflation for the coming two years, expecting 1.7 percent next year and 1.9 percent for 2017, still below the Fed’s policy target of 2.0 percent.
Nevertheless, 13 of the 17 Fed officials at the meeting indicated they expect a rate hike by the end of this year, most of them pointing to a 0.25-0.50 percent range.
The decision was not surprising, and Wall Street held onto modest gains, the S&P 500 up 0.33 percent in afternoon trade.
The dollar fell nearly 1.0 percent, however, to $1.1395 against the euro.