Fed keeps rates unchanged, sets up possible December hike

The U.S. Federal Reserve kept interest rates unchanged on Wednesday, but downplayed global economic headwinds and left the door open to tightening monetary policy at its next meeting in December.

Following a two-day policy meeting, the central bank said it was still monitoring economic and financial developments abroad, but did not repeat that global risks would have a likely impact on the U.S. economy, as it warned at its last meeting in September.

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That omission marked a softening in tone compared to the Fed's statement last month.

The Fed's policy-setting committee also noted that U.S. job growth had slowed and the unemployment rate had held steady. It repeated in its statement that "underutilization of labor resources has diminished."

"The committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced," the Fed said in its statement. It added that the U.S. economy has been expanding at a moderate pace.

Most Fed policymakers have said they expect to raise rates in 2015, but two broke ranks with Fed Chair Janet Yellen this month, questioning her view that labor market tightness will fuel inflation and overheat the economy.

They urged caution rather than a rate increase, arguing that a weakening global economy could sap U.S. economic growth and keep inflation too low.

The Fed has struggled to convince skeptical investors that a rate hike is imminent. Before Wednesday's meeting, financial markets saw virtually no chance it would raise rates this week and only a 34 percent chance of such a move in December. A rate hike was generally not expected until March.

A narrow majority of economists polled by Reuters predicted a rate increase in December.

The main stumbling block is that U.S. economic growth has been generally tepid and inflation low even though unemployment has fallen.

Fed Chair Janet Yellen:

Compounding the situation, central banks from the euro zone to China are easing monetary policy, keeping upward pressure on the U.S. dollar. That hurts American exporters and acts as a brake on inflation.

In its statement, the Fed repeated it wants to be "reasonably confident" that low inflation will rise to its 2 percent target.

Yellen is not scheduled to hold a news conference on Wednesday.

The Fed has two months of data to parse, including Thursday's third-quarter GDP estimate as well as employment reports for October and November, before deciding if the economy is strong enough to withstand its first rate hike since 2006.

It will also get a chance to see how monetary policy easing in Europe, Japan and China plays out in financial markets. When the European Central Bank hinted last week at more bond-buying stimulus to come, the dollar rose 3 percent.

Richmond Fed President Jeffrey Lacker dissented on Wednesday for the second consecutive meeting.

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