Fed keeps rates unchanged, says 'monitoring' global economy

Inflation is expected to remain low in the near term, in part because of the further declines in energy prices.

Observing that it was "closely monitoring" the global economic and financial developments, the US Federal Reserve said it has kept the interest rates unchanged, following which the Dow fell about 223 points.

The Federal Reserve on Wednesday said it was "closely monitoring global economic and financial developments and is assessing their implications for the labour market and inflation, and for the balance of risks to the outlook."

Given the economic outlook, the Fed decided to maintain the target range for the federal funds rate at 1/4 to 1/2 per cent.

The stance of monetary policy remains accommodative, thereby supporting further improvement in the labour market conditions and a return to two per cent inflation, it said in a statement.

The Fed said it currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labour market indicators will continue to strengthen.

Inflation is expected to remain low in the near term, in part because of the further declines in energy prices, but to rise to two per cent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labour market strengthens further, it added.

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

However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data, it said.

The Fed statement soon had its impact on the market. The Dow, which was up about 10 points before the release, dropped down 223 points soon thereafter.

"Renewed fears about the economic slowdown in China and a drop in oil prices have knocked down stocks around the world this year," The Wall Street Journal said.

"The Fed basically said that we are paying attention to markets and global developments, but we stick to our game plan" of interest-rate increases, Gene Tannuzzo, senior fixed-income portfolio manager at Columbia Threadneedle Investments, which had $471 billion assets under management at the end of September, was quoted as saying.

"The equity market wanted more from the Fed," he said.