Feeling global slowdown, Fed keeps interest rate unchanged

The Federal Reserve cut its outlook for the US economy and kept its interest rate policy unchanged, citing the impact of the global slowdown and turmoil in world markets.

Giving a picture of the US economy that was less bullish than many had expected, the Fed still forecast continuing hikes to the benchmark federal funds rate this year, but at a slower pace than foreseen in December.

Fed Chair Janet Yellen said the Federal Open Market Committee, the Fed's policy body, opted for "a slightly more accommodative path" given "soft" US business investment and weak exports in recent months.

But, she added, "this decision partly reflects the implications for the US economy of the global economic and financial developments." In revisions to its buoyant December forecasts, the FOMC said it expects the US economy to grow only 2.2 per cent this year, compared with 2.4 per cent previously.

It also said that inflation would likely remain very low at 1.2 per cent by the end of the year, far shy of the Fed's 2.0 per cent policy target.

That seemed at odds with today's report of solid growth in core consumer prices of 2.3 per cent year-on-year, which some analysts said was a clear sign that the Fed's efforts to push up inflation were having effect.

But Yellen told a press conference after the Fed released its policy statement that she was not convinced by apparent signs of upward inflationary pressures.

Some of the apparent gains in prices, Yellen said, relate to "categories that tend to be quite volatile, without very much significance for inflation over time." "So I'm wary, and haven't yet concluded that we have seen any significant uptick that will be lasting in, for example, in core inflation." In its rate decision, the FOMC held the benchmark fed funds rate at an ultra-low 0.25-0.50 per cent, where it was set in December.

FOMC officials also pulled back on their previous projections of up to four quarter-point interest rate increases this year. Instead, they indicated they expect a rate of about 0.9 per cent at year-end, on average, implying possibly two increases this year.

The Fed's stance proved much less bullish than markets had expected. At 1900 GMT the dollar was down about 0.8 per cent at USD 1.1194 per euro, and lost about 0.3 per cent on the yen at 112.79 yen.

Treasury bond yields were sharply lower, with the 10-year bond falling to 1.92 per cent from 2.0 per cent before the FOMC statement.