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Fed keeps rate, pares back future hikes

March 16, 2016

The Federal Reserve kept interest rates steady, while indicating that economic headwinds around the world means the central bank won't raise rates as high as it had originally planned.

https://p.dw.com/p/1IEKL
Janet Yellen
Image: picture-alliance/dpa

The Federal Reserve left interest rates unchanged on Wednesday, but indicated that the growing US economy and especially gains in the labor market would allow it to tighten policy again this year – but not as much as originally expected.

"A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation picked up in recent months," the U.S. central bank said in a statement where it kept the target range for its overnight lending rate at 0.25 percent to 0.50 percent.

Uncertain global economy calls for caution

However, the Fed also pointed to potential headwinds from a shaky global economy, keeping growth moderate and inflation low for the rest of the year. Fed Chair Janet Yellen also said the Federal Open Market Committee, the Fed's policy body, decided on caution given "soft" US business investment and weak exports in recent months.

USA, Gebäude der Federal Reserve Bank in Washington DC
Federal Reserve in Washington DCImage: picture alliance/AP Images/J. Scott Applewhite

"The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate," said Fed chair Janet Yellen. "The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run."

Two hikes by the year's end, not four

Fresh projections point to two quarter-point hikes by the year’s end, moving away from the four rate increases anticipated when the Fed raised rates for the first time in a decade last December.

Policymakers lowered their estimate of where the targeted lending rate would be in the long run to 3.30 percent from 3.50 percent.

The unemployment rate is expected to fall to 4.7 percent by the end of year, and go down even more in 2017 and 2018. But Yellen stressed there was room for improvement.

"Involuntarypart-time employment remains somewhat elevated, and wage growth has yet to show a sustained pickup," she said.

Policymakers also adjusted their inflation forecast downward from 1.2 percent from 1.6 percent, but see it recovering to close to the central bank's 2 percent medium-term target next year.

jd/hg (AP, Reuters)