US Fed keeps rates unchanged, but discounts markets

18 Sep 2015


The US Federal Reserve, at its meeting on Thursday, decided to leave policy interest rate unchanged, as, according to it, the current interest rate regime is appropriate to support continued progress toward maximum employment and price stability.

Janet YellenThe Federal Open markets Committee, the policy forming body of the US central bank, reaffirmed its view that the current 0 to 0.25 per cent target range for the federal funds rate remains appropriate.

The Fed said the committee will determine how long to maintain this target range after assessing the progress - both realised and expected - toward its objectives of maximum employment and 2 per cent inflation.

This assessment will take into account information on labour market conditions, inflation indicators and expectations, and financial and international developments.

The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium term.

Speaking at a news conference in Washington after the interest rates announcement, Federal Reserve chair Janet Yellen said that slowing in China's economy has long been expected and that ''there are no surprises there''.

''Developments we saw in financial markets in August partly reflected concerns of downside risk to Chinese economic performance and the deftness with which policymakers are addressing those concerns,'' said Yellen.

When it comes to markets turbulence, Yellen said, the Fed is "not responding to it but are analysing it".

''The Fed should not be responding to ups and downs in the markets. It certainly is not our policy to do so,'' she said, adding that the Fed does ask what is causing these ups and downs.

The committee is maintaining its existing policy of rolling over government through fresh issues and repurchases of Treasury securities at auctions in order to keep the committee's holdings of longer-term securities at sizable levels, in order to maintain accommodative financial conditions.

Fed said once the FOMC decides to begin removing policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 per cent.

The committee currently anticipates that even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run.

The Fed committee noted that US household spending and business fixed investment have been increasing moderately, and the housing sector has improved further. However, net exports have been soft.

The labour market continued to improve, with solid job gains and declining unemployment. On balance, labour market indicators show that underutilisation of labour resources has diminished since early this year, Fed noted.

Inflation has continued to run below the committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.

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.

Nonetheless, the committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the committee judges consistent with its dual mandate.

The committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad.

Inflation is anticipated to remain near its recent low level in the near term but the committee expects it to rise gradually toward 2 per cent over the medium term as the labour market improves further and the transitory effects of declines in energy and import prices dissipate.

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