Facing global uncertainty, Fed keeps lid on rates

WASHINGTON - The Federal Reserve voted Thursday to maintain its unprecedented support for the U.S. recovery, leaving a key interest rate unchanged amid gathering clouds over the global economy.

In an official statement, the nation's central bank said the job market is recovering and hiring is 'solid.” But it expressed concern that inflation remains too low and exports have weakened. And the risk is building that turmoil overseas will drag down growth in America.

'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 official statement read.

The decision to keep the Fed's benchmark interest rate near zero amounts to a recognition that the robust recovery central bank officials had hoped for when they launched into an uncharted era of easy money during the throes of the 2008 financial crisis has yet to materialize.

The Fed has repeatedly pushed back the goal line as the economy failed to deliver. Seven years after the Fed cut its target rate to virtually zero, its officials believe the recovery is not ready to stand on its own. Documents released by the Fed show most of the Fed's top brass now anticipate increasing rates only once this year, instead of twice. A growing minority think the central bank should not raise its benchmark rate this year at all, and one suggested it should stimulate the economy even more by taking the rate negative.

Three officials are advocating a 2016 liftoff, while one person pinned 2017 as the date - longer than anyone had suggested so far.

The Fed lowers its target rate when it wants to stimulate the economy by encouraging businesses and consumers to spend. It hikes when the economy begins to grow too quickly and inflation picks up, making saving money more attractive.

The Fed modestly upgraded Thursday its expectation for economic growth this year from 1.9 percent to 2.1 percent, but the forecast still is lower than the robust expansion enjoyed a decade ago. The jobless rate has already fallen below the central bank's June estimate of 5.3 percent. The Fed adjusted its forecast to 5 percent. It also nudged up its estimate of core inflation from 1.3 percent to 1.4 percent.

In May, Fed Chair Janet Yellen said in a speech that she expected the economy would be strong enough to raise the target rate by the end of the year. Other top Fed officials had signaled the long-awaited move could have come during its meeting this month.

But that was before the jaw-dropping swings in financial markets over the past few weeks, including a 1,000-point plunge in the Dow Jones industrial average. Evidence is mounting that China's breakneck economic growth is fizzling out faster than previously thought.

At the same time, a strong dollar and low oil prices are weighing on inflation, which has run below the Fed's target of 2 percent for years.

In its official statement, the Fed attempted to assure investors and the public that after the first rate hike, it expects to make subsequent hikes only gradually. Though most officials predicted the Fed would raise its target rate several times next year, they also forecast it would remain below its historic norm of about 4 percent for several years.

'One should never discount the importance of an interest rate change by a central bank merely because it looks small,” said Scott Sumner, an economist at the Mercatus Center at George Mason University. 'Some pretty big avalanches have started from a small pebble being dislodged.”