Federal Reserve keeps key interest rate at zero, citing global turmoil

Washington (Sept 17)  The Federal Reserve on Thursday voted 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. Meanwhile, 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 central bank's official statement read.

The decision to keep the Fed’s benchmark interest rate at 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 central bank cut its target rate to zero, Fed officials believe the recovery is not yet 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 has suggested so far.

“Even though the summer stresses in financial markets have abated, the impact of the intense market volatility on domestic economic activity is yet to fully play out,” Millan Mulraine, deputy chief U.S. macro strategist at TD Securities, wrote in a research note.

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.

Timing, however, is crucial. If the Fed moves too soon, it risks undercutting the recovery’s momentum. Waiting too long could stock dangerous financial bubbles.

The Fed modestly upgraded Thursday its expectation for economic growth this year from 1.9 percent to 2.1 percent, but the forecast is still 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.

Source: WashingtonPost