US interest rates left unchanged by Federal Reserve

Federal Reserve chairwoman Janet Yellen and eight colleagues voted to keep rates where they are Image copyright Reuters
Image caption Federal Reserve chairwoman Janet Yellen and eight colleagues voted to keep rates where they are

The US central bank has decided not to raise interest rates, keeping them at the same level they have been at since December 2008.

The Federal Reserve made it clear that concerns over the strength of the global economy had influenced its decision not to lift rates.

Nine members of its key policymaking committee voted to hold the federal funds rate target at 0 to 0.25%.

One committee member, Jeffrey Lacker, favoured a 0.25 percentage point rise.

In a statement, the Federal Open Market Committee said: "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."

Signs of weaker growth and stock market turmoil in China have led to fears among investors about US economic growth.

"We've long expected to see some slowing in Chinese growth over time as they rebalance their economy. There are no surprises there. The question is whether or not there will be a risk of a more abrupt slowdown than most analysts expect," Fed chairwoman Janet Yellen said at a press conference.

'Economic conditions'

There had been intense speculation over the Fed's decision this week, with analysts split over whether it would raise rates now or hold fire.

The Fed's long-term policy is to keep interest rates low until employment levels improve further and the main US inflation rate approaches its 2% target.

Inflation currently remains subdued in the US, kept down by cheaper oil and a strong dollar.

The central bank said that it still wanted to see more improvement in the labour market, even though recent data showed that the unemployment rate for August was 5.1%, the lowest since 2008.

The Fed also wants to be "reasonably confident" that inflation will increase.

"The committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run," it said.

The number of Fed policymakers who predicted a rate increase this year dropped to 13 from 15 in June, out of a total of 17.

'Global slowdown'

When the Federal Reserve does start to raise rates, policymakers have forecast slow increases.

These would probably be just 0.25 of a percentage point this year, followed by one percentage point in 2016 and then a further 1.25 percentage point increase in 2017.

There will be two more meetings this year of the Fed's Open Markets Committee, which sets rates, in October and December.

"The bigger issue here was the international situation - the idea that there was a global slowdown. Between the economic uncertainty and the slowdown in China that is really what's driving the decision to keep them at zero," Karissa McDonough, senior fixed income strategist at People's United Wealth Management told the BBC.

"To my mind the Fed wants to focus on the domestic economy, but even before the financial crisis we are linked globally to much greater extent than we have been," she added.

Disappointing or right?

Most US stocks closed lower and the dollar fell after the Fed's announcement.

The Dow Jones closed down 65.21 points at 16,674, while the S&P 500 fell 5 points to 1,990.

However, the tech-heavy Nasdaq was up 4 points at 4,893.

The dollar index, which compares the value of the currency with six others, fell 1.02%, to 94.447.

In the UK, the reaction from business groups was mixed.

James Sproule, chief economist at the Institute of Directors said: "The Federal Reserve's decision to hold interest rates is disappointing. It lacks the bold and necessary steps which must be taken to normalise monetary policy."

Meanwhile, John Longworth, director general of the British Chambers of Commerce, said: "Given the current global uncertainty, the Fed was right to keep rates on hold for now, and avoid exacerbating the problem."

Ms Yellen was asked in the Fed's news conference if protesters outside the meeting demanding low rates - and outside their last meeting at Jackson Hole - had affected the decision to leave interest rates unchanged.

"We value all the opinions of individuals and some interesting groups. But at the end of the day, it's all about the data," she said.

Analysis: Michelle Fleury, New York business correspondent

A hike is still on the table before the end of the year. Fed Chairwoman Janet Yellen said that was still the majority view of the Federal Open Market Committee members - the group responsible for setting US interest rates.

America's unemployment rate continues to move in the right direction. The housing market is stronger. Business confidence is high.

Despite these positive signs, the committee members still decided the US economy wasn't ready yet for higher rates.

During her press conference, Janet Yellen gave a long list of reasons, including serious worries about China, little evidence of inflation and slack in the labour market.

So will the U.S. Raise interest rates in December? Market watchers are waiting to see if the Fed will deliver an early Christmas surprise.

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