Fed Keeps Rates Unchanged, Wary Eye on Global Markets

US Federal Reserve holds policy rates but a hike is likely in the next policy meeting in March, say experts.

• US central bank holds rates steady; says closely watching global economic developments
  
• March rate hike still in play, investors bet on one quarter-point rate increase in 2016
  
• Fed says “closely monitoring” global economic and financial developments
  

The US Federal Reserve kept interest rates unchanged on Wednesday and said it was “closely monitoring” global economic and financial developments, signaling it had accounted for a stock market selloff but wasn’t ready to abandon a plan to tighten monetary policy this year.

The decision by the central bank’s rate-setting committee was widely expected after a month-long plunge in US and world equities raised concerns an abrupt global slowdown could drag US growth.

Fed policymakers said the economy was still on track for moderate growth and a stronger labor market even with “gradual” rate increases, suggesting its concern about global events had diminished but not squashed chances of a rate hike in March.

The committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation.

Fed Policy Statement

Fed Closely Watching Global Markets

Wall Street fell after the statement, with the Standard & Poor’s 500 index closing down more than 1 percent. Prices for US Treasuries were mixed, while the dollar extended losses against a basket of currencies.

In an indication the Fed was taking global risks seriously, a prior reference to the risks to the economic outlook being “balanced” was removed from its statement. Instead, it said it was weighing how the global economy and financial markets could affect the outlook.

“It is clear that several FOMC members have become more worried,” said Harm Bandholz, an economist at Unicredit in New York, referring to the Fed’s rate-setting Federal Open Market Committee.

Wall Street’s top banks expect only three rate increases before the end of the year, according to a Reuters poll released after the Fed’s statement on Wednesday. That was in line with expectations earlier in January.

Investors are betting on one quarter-point rate increase in 2016.

Labour Market Improving, Says Fed

US exports took a hit last year, largely due to the impact of a strong dollar, but consumer spending accelerated and overall employment surged by 292,000 jobs in December.

The Fed said on Wednesday that a range of recent labour market indicators, including “strong” job gains, pointed to some additional firming in the job market.

Oil prices have also plummeted this year, which could keep US inflation below the Fed’s 2 percent target for longer, but the central bank said it still expects the downward inflationary pressure from lower energy and import prices to prove temporary.

Policymakers will be able to sift through the January and February US employment reports before their next policy meeting in March.