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Fed keeps rate at record low after slowdown in job growth

October 28, 2015

The Federal Reserve is keeping U.S. interest rates at record lows in the face of persistent threats from a weak international economy and excessively low inflation.

Fed officials said Wednesday that the U.S. economy is still expanding modestly. But, in a nod to recent weaker data, they said in a written statement that the pace of job gains had slowed—an indication that they may be concerned about the pace of hiring.

At the same time, the policymakers sounded less gloomy about global economic pressures. They removed a sentence from their September statement that had warned about global pressures after news of a sharper-than-expected slowdown in China.

The Fed offered little clarity on the likely timing of a rate hike. Some Fed officials have signaled a desire to raise rates before year's end. But tepid economic reports have led many analysts to predict no hike until 2016.

The decision, after the Fed's latest policy meeting, was approved on a 9-1 vote, with Jeffrey Lacker, president of the Fed's Richmond regional bank, dissenting. As he had in September, Lacker favored a quarter-point rate hike.

The Fed has kept the target for its benchmark funds rate at a record low in a range of zero to 0.25 percent since December 2008.

Yellen and some other Fed officials have said a rate hike is still likely by the end of this year. But many analysts point to a string of weaker-than-expected economic reports in recent weeks that they think will lead the Fed to delay any rate increase until 2016.

What's changed is a global economic slowdown, led by China, that's inflicted wide-ranging consequences. U.S. job growth has flagged. Wages and inflation are subpar. Consumer spending is sluggish. Investors are nervous. And manufacturing is being hurt by a stronger dollar, which has made U.S. goods pricier overseas.

Though analysts say a rate hike at the central bank's next meeting in December is possible, two key Fed officials have called even that prospect into question.

The Fed cut its benchmark rate to near zero during the Great Recession to encourage borrowing and spending to boost a weak economy. Since then, hiring has significantly strengthened, and unemployment has fallen to a seven-year low of 5.1 percent.

But the Fed is still missing its target of achieving annual price increases of 2 percent, a level it views as optimal for a healthy economy.

At the start of the year, a rate hike was expected by June. A harsh winter, though, slowed growth. And then in August, China announced a surprise devaluation of its currency. Its action rocked markets and escalated fears that the world's second-largest economy was weaker than thought and could derail growth in the United States.

Uncertainty was too high, Fed officials decided, for a rate hike in September.

Since then, the outlook has dimmed further with a hiring slowdown and tepid retail sales and factory output. Also, inflation has fallen further from the 2 percent target because of falling energy prices and a stronger dollar, which lowers the cost of imports.

The Fed has said it will start raising rates once it's "reasonably confident" inflation will return to 2 percent within two to three years. Yellen has said that confidence should be boosted by a stronger job market, which will help raise workers' pay.

But this month, two Fed board members — Lael Brainard and Daniel Tarullo — questioned the link between falling unemployment and higher inflation. Both expressed doubts about whether the timing would be right for a rate hike this year.

This week's Fed meeting also followed decisions by other major central banks — from Europe to China and Japan — to pursue their own low-rate policies. Against that backdrop, a Fed rate hike would boost the dollar's value and thereby squeeze U.S. exporters of farm products and factory goods by making them costlier overseas.

Congress may help if a budget deal announced this week wins congressional approval. That could avert a government shutdown and raise the government's borrowing limit — two threats that concern Fed policymakers.

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