THE Federal Reserve held interest rates at record lows as concern about an increasingly brittle global economy overshadowed evidence of a resilient US recovery.

The US central bank maintained its 0 to 0.25pc target range for the federal funds rate, warning that recent developments in the global economy and markets may ‘restrain economic activity somewhat’ as well as pushing down inflation in the near term.

The move comes despite calls from central banks in several emerging markets for the Fed to bring an end to the endless speculation about its first increase since before the financial crisis.

On the other side of the argument, both the International Monetary Fund and the World Bank have been calling for the Fed to hold fire, in part because of fears over the impact a rise could have on fragile emerging markets.

Policymakers want more time before tightening

Interest rate forecasts from policy- makers suggested most still expect that the first increase in short-term rates will happen this year, but three officials now expect the central bank to hold fire until 2016, and one does not predict a move until 2017.

The Federal Open Market Commi­ttee’s decision suggests it wants more time to digest the economic impact of August’s violent moves in financial markets, as well as the extent of the slowdown in many emerging economies. It perpetuates the extended period of uncertainty in markets surrounding the timing of the Fed’s first rise, as the central bank gauges when it can finally follow through with its long-anticipated tightening of policy.

The Fed only has two more meetings left this year — in October and December — if it is to meet chair Janet Yellen’s previous guidance that a rise is likely in 2015. One voter — Richmond Fed president Jeffrey Lacker — voted for a quarter-point rise at the September 17 meeting.

The decision to hold rates at zero to a quarter point suggests Fed policymakers remain fearful of crushing a recovery that they have gone to huge lengths to nurture, given the fierce headwinds from overseas, including a 15pc rise in the trade weighted dollar in the past year, volatile financial markets, weakening emerging market growth, and signs of a sharp slowdown in China’s economy.

In its statement, the Fed said: “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 committee reiterated that it would move rates when it had seen ‘some further improvement’ in the labour market and is reasonably confident that inflation will move back to the 2pc objective in the medium term.

Projections released with the statement showed that some 13 of Fed policymakers expect a rate rise in 2015, down from 15 previously. Three others are looking for firming to occur in 2016, and one further out in 2017.

Reflecting America’s resilient domestic economy, projected unemployment numbers were stronger across the forecast, with the median forecast rate tipped to fall below 5pc to 4.8pc in 2016 and 2017. Policymakers’ median estimate for the longer-run jobless rate was 4.9pc, down from 5pc previously.

Published in Dawn, Business & Finance weekly, September 21st, 2015

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