The U.S. Federal Reserve on Thursday kept its benchmark interest rate unchanged, saying the rising uncertainty abroad and low inflation were the key reasons behind the decision.
After concluding a two-day monetary policy meeting, the Fed said in a statement that the economic activity is expanding at moderate rate with labor market approaching maximum employment but inflation staying muted.
However, in light of the heightened uncertainties abroad and a slightly softer expected path for inflation, the Fed judged it appropriate to wait for more evidence, including some further improvement in the labor market to bolster its confidence that inflation will rise to 2 percent in the medium term, Fed chairwoman Janet Yellen said at the press conference on Thursday.
In regard to foreign developments, the central bank is paying more attention to the developments in China and emerging economies, according to Yellen.
China's economy is growing at a slower pace as it rebalances its economy, which has no surprise, said Yellen, but adding that developments in financial markets in August, in part, reflected concerns that there was down-side risk to Chinese economic performance.
In addition, the substantial downward pressures on oil prices and commodity markets have significant negative impact on resources-exporting emerging markets and advanced economies. Important emerging markets have seen significant outflows of capital, pressures on their exchange rates and concerns about their future performance.
Besides the rising uncertainty in emerging markets, the low inflation is one of the reasons holding the Fed back in raising interest rates.
The core personal consumption expenditure (PCE) price index, an inflation gauge preferred by the Fed, only went up 1.2 percent year on year in July, far below the central bank's 2 percent. The index has been below the Fed's target for over three years.
The recent drop in oil prices and the further appreciation of U.S. dollar have put some downward pressure in the near-term on inflation, which means that it will take a bit more time for these transitory effects to fully dissipate, said Yellen.
According to the Fed officials economic projections released on Thursday, they expected the core PCE price index won't meet the Fed's target until 2018, while the unemployment rate will drop to 4.8 percent, below 4.9 percent, the level the Fed considered as full employment.
Yellen said that as the labor market heals, there will be further upward pressure on inflation. But She said the process is slow and is characterized by lags, and that is why it takes a few years as the inflation to get back to 2 percent, while the unemployment rate falls and even overshoots its longer-run normal level.
The Fed still leaves door open to a rate hike sometime this year. Most Fed officials still expect a first rate increase this year, Yellen said, noting that 13 out of the 17 Federal Reserve Board members and Federal Reserve Bank presidents are looking for a move in 2015.
The Federal Open Market Committee, the monetary policy decision body, will hold two policy meetings this year, in October and December. According to Yellen, every meeting has possibility for a rate increase.
Yellen reiterated that market should pay less attention to the timing of the first interest rate increase and more attention to the expected path of rates.
"The stance of monetary policy will likely remain highly accommodative for quite some time after the initial increase in the federal funds rate," said Yellen.
