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Fed passes on rate hike, cites global risks and projects fewer rate increases in 2016

The Federal Reserve left interest rates unchanged on Wednesday, acknowledging risks abroad and growth in the U.S. economy.

Following its two-day policy meeting, the central bank voted to keep its benchmark interest rate between 0.25% and 0.50%. One member of the committee, Esther L. George, voted against the decision, preferring to raise the federal funds rate to 0.50% to 0.75% at this meeting.

The Fed began the process of raising rates in December for the first time in over a decade, but increased market volatility and headwinds in Europe and China early this year convinced many officials to delay further rate increases.

The central bank’s statement noted that “global economic and financial developments continue to pose risks," implying that uncertainty and headwinds abroad could delay the pace of further increases.

However, the Fed emphasized that "economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months."

The Fed pointed to some positives in the economy, including gains in the labor market and the housing sector. Since the Fed's last meeting, a slew of strong U.S. data, including better-than-expected job growth and steady low unemployment, reassured markets.

While U.S. inflation has run below the Fed’s 2% target for four years, it has recently shown signs of improvement. The Fed’s preferred measure of price inflation, the personal consumption expenditures index, rose 1.3% in January year-over-year, while core inflation increased 1.7%. However, several measures of expected future inflation have been soft, and the Fed foresees inflation remaining “low in the near term."

Fed forecasting

The Fed’s expectations for GDP growth in the short-term dropped since December, while forecasts for core inflation remained mostly unchanged, and the median expectation for unemployment fell slightly to 4.5% by 2018.

Fed officials’ projections for the federal funds rate indicate two quarter-point rate hikes this year, a slower pace of rate increases than envisioned last December. The Fed previously expected to raise rates four times this year.

The downshift in rate increases may not be due to new concerns over the domestic or global economy, but may simply be an extension of the Fed's January decision to keep accommodative policy measures in place.

Market expectations for a June rate hike are split, with the majority of traders predicting at least one rate hike by the end of the year.

 

Follow Justine Underhill on Twitter: @jj_under