Fed keeping U.S. interest rates at record lows

Staff/wire report

WASHINGTON

The Federal Reserve is keeping U.S. interest rates at record lows 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 Thursday that while the U.S. 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 U.S. and global economy. And low oil prices and a high-priced dollar have kept inflation undesirably low.

“The Fed Reserve is reacting to the unknown,” said George Mokrzan, senior economist for Huntington Bank.

That unknown is the international economy.

In a statement, Fed officials stressed that they were “monitoring developments abroad” and that the global slowdown might restrain U.S. economic growth and inflation levels. This appeared to be a reference to China, the world’s second-largest economy, whose economy has slowed for four-straight years – from 10.6 percent in 2010 to 7.4 percent last year.

The Fed has kept its key short-term rate near zero since 2008.

A higher Fed rate eventually would send rates up on many consumer and business loans.

Mokrzan said the low interest rates will be helpful to small businesses.

“The overall economy will be important for small businesses,” Mokrzan said.

The low interest rates also have helped to fuel auto sales, which are supposed to come in at more than 17 million sales this year.

“This is probably a stimulus for a little longer,” Mokrzan said.

At a news conference, Fed Chairwoman Janet Yellen said a rate hike was still likely this year. A majority of Fed officials on the committee that sets the federal funds rate – which controls the interest that banks charge each other – still foresee higher rates before next year.

The Fed will meet next in October and then in December.

Even after the first increase off of zero, Fed interest rate policy will be “highly accommodative for quite some time,” Yellen stressed.

Wall Street’s early reaction to the Fed’s decision, which investors had widely expected, was muted. U.S. stock indexes were up slightly and roughly where they were before the Fed released its policy statement at 2 p.m.

Bond investors seemed cheered by the Fed’s decision to keep rates ultra-low.

The Fed’s action Thursday 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.

The Fed’s preferred measure of inflation was up just 1.2 percent in the latest reading and has been below 2 percent 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 had 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 the 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 percent, down from a 0.7 percent 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 percent increase next year, still below its 2 percent target.

The new forecast has unemployment dropping to 5 percent by the end of this year, down from 5.3 percent in June. The unemployment rate in August dropped to a seven-year low of 5.1 percent.