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 In what amounted to a tactical retreat, Fed Chair Janet Yellen
said developments in a tightly linked global economy had in effect
forced the U.S. central bank's hand.
"The outlook abroad appears to have become less certain," Yellen
told a news conference after the Fed's policy-setting committee
released a statement following a two-day meeting.
She added that a recent fall in U.S. stock prices and a rise in the
value of the dollar already were tightening financial market
conditions, which could slow U.S. economic growth regardless of what
the Fed does.
"In light of the heightened uncertainty abroad ... the committee
judged it appropriate to wait," Yellen said.
The policy statement also nodded squarely to the global economy as a
decisive variable within Yellen's "data-dependent" Fed, warning that
recent developments abroad and in financial markets might restrain
economic activity somewhat and likely put further downward pressure
on inflation in the near term.
But the Fed maintained its bias toward a rate hike sometime this
year, while lowering its long-term outlook for the economy.
Fresh economic projections showed 13 of 17 Fed policymakers foresee
raising rates at least once in 2015, down from 15 at the last
meeting in June.
Traders in futures markets cut bets that the central bank would lift
rates by December to around a 47 percent probability, from 64
percent before the release of the policy statement.
"We're in the same situation we were in before, which is uncertainty
about when are they going to move," said John Bonnell, a senior
portfolio manager at USAA Investments in San Antonio, Texas.
Four Fed policymakers now say rates should not be raised until at
least 2016, compared to two who felt that way in June. The Fed has
policy meetings in October and December.
In deciding when to hike rates, the Fed repeated it wanted to see
"some further improvement in the labor market," and be "reasonably
confident" that inflation will increase. The dollar fell sharply
against a basket of currencies after the release of the statement.
Stocks initially edged higher before falling and ending the trading
session lower. Prices for U.S. Treasuries rose.
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'MORE DOVISH'
Taken as a whole, the latest Fed projections of slower GDP growth,
low unemployment and continuing low inflation suggest that concerns
of a so-called secular stagnation may be taking root among
policymakers. One policymaker even suggested a negative federal
funds rate.
The median projection of the 17 policymakers showed the Fed expects
the economy to grow 2.1 percent this year, slightly faster than
previously thought. However, its forecasts for GDP growth in 2016
and 2017 were downgraded.
The Fed also forecast inflation would creep only slowly toward its 2
percent target even as unemployment dips lower than previously
expected. It sees the unemployment rate hitting 4.8 percent next
year and remaining at that level for as long as three years.
The Fed's projected interest rate path shifted downward, with the
long-run federal funds rate now seen at 3.5 percent, compared to
3.75 percent at the last policy meeting.
Fed officials like board member Jerome Powell and Atlanta Fed
President Dennis Lockhart in recent months had publicly endorsed a
September rate hike, forming a near majority along with longstanding
inflation hawks like Richmond Fed President Jeffrey Lacker. Only
Lacker, who wanted to raise rates by a quarter percentage point,
dissented on Thursday.
(Reporting by Howard Schneider and Ann Saphir in Washington;
Additional reporting by Jason Lange in Washington; Editing by David
Chance and Paul Simao)
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