Fed keeps rates steady, signals one hike by end of year

WASHINGTON, Sept 21 (Reuters) - The U.S. Federal Reserve left interest rates unchanged on Wednesday but strongly signaled it could still tighten monetary policy by the end of this year as the labor market improved further.

The Fed said U.S. economic activity had picked up and job gains were "solid" in recent months.

"The case for an increase in the federal funds rate has strengthened," the U.S. central bank said in a statement following a two-day policy meeting.

It added that its rate-setting committee had decided against raising rates "for the time being," until there was more evidence of progress towards its employment and inflation objectives.

The Fed has held its target rate for overnight lending between banks in a range of 0.25 percent to 0.50 percent since December, when it raised borrowing costs for the first time in nearly a decade.

Photos of Federal Reserve Chair Janet Yellen:

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Federal Reserve Chair Janet Yellen
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Janet Yellen, chair of the U.S. Federal Reserve, pauses while speaking during the annual Philip Gamble Memorial Lecture at the University of Massachusetts Amherst in Amherst, Massachusetts, U.S., on Thursday, Sept. 24, 2015. Yellen said the U.S. central bank is on track to raise interest rates this year, even as she acknowledged that economic 'surprises' could lead them to change that plan. Photographer: Scott Eisen/Bloomberg via Getty Images
Janet Yellen, chair of the U.S. Federal Reserve, speaks during the annual Philip Gamble Memorial Lecture at the University of Massachusetts Amherst in Amherst, Massachusetts, U.S., on Thursday, Sept. 24, 2015. Yellen said the U.S. central bank is on track to raise interest rates this year, even as she acknowledged that economic 'surprises' could lead them to change that plan. Photographer: Scott Eisen/Bloomberg via Getty Images
Attendees applaud as Janet Yellen, chair of the U.S. Federal Reserve, not pictured, concludes her speech during the annual Philip Gamble Memorial Lecture at the University of Massachusetts Amherst in Amherst, Massachusetts, U.S., on Thursday, Sept. 24, 2015. Yellen said the U.S. central bank is on track to raise interest rates this year, even as she acknowledged that economic 'surprises' could lead them to change that plan. Photographer: Scott Eisen/Bloomberg via Getty Images
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The central bank has appeared increasingly divided over the urgency of raising rates. On Wednesday, Kansas City Fed President Esther George, Cleveland Fed President Loretta Mester and Boston Fed President Eric Rosengren dissented on the policy statement, saying they favored raising rates this week.

At the same time, policymakers cut the number of rate increases they expect this year to one from two previously, according to the median projection of forecasts released with the statement. Three of the 17 policymakers said rates should remain steady for the rest of the year.

The Fed also projected a less aggressive rise in interest rates next year and in 2018, and cut its longer-run interest rate forecast to 2.9 percent from 3.0 percent.

But in a sign of growing confidence, the Fed said the near-term risks for the economic outlook "appear roughly balanced." That means policymakers think the economy is about as likely to outperform forecasts as to underperform them.

Fed Chair Janet Yellen was due to hold a press conference at 2:30 p.m. EDT (1830 GMT).

The Fed in December signaled that four rate increases were likely this year, but that was scaled back in March due to a global growth slowdown, financial market volatility and concerns about tepid U.S. inflation.

The economy expanded sluggishly in the second quarter and added fewer jobs than expected in August. Inflation also showed signs of stirring last month.

The Fed's decision, which came the same day that Japan's central bank added a long-term interest rate target to its massive asset-buying program in an overhaul of its policy framework, was widely anticipated by economists.

A Reuters poll showed the median probability of a September rate rise was about 25 percent. Only 6 percent of those surveyed expected the Fed to raise rates, with the majority believing it would wait until December.

The Fed has policy meetings scheduled in early November and mid-December. Economists believe policymakers would avoid a rate hike in November in part because the meeting falls just days before the U.S. presidential election. (Reporting by Jason Lange, Lindsay Dunsmuir and Howard Schneider; Editing by Paul Simao)

Federal Reserve headquarters in Washington, D.C.:

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A Federal Reserve police officer keeps watch while posted outside the Federal Reserve headquarters in Washington, September 16, 2015. The Federal Reserve, facing this week its biggest policy decision yet under Chair Janet Yellen, puts its credibility on the line regardless of whether it waits or raises interest rates for the first time in nearly a decade. REUTERS/Kevin Lamarque
A woman jogs past the Federal Reserve headquarters in Washington September 16, 2015. The Federal Reserve, facing this week its biggest policy decision yet under Chair Janet Yellen, puts its credibility on the line regardless of whether it waits or raises interest rates for the first time in nearly a decade. REUTERS/Kevin Lamarque
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A woman walks past the Federal Reserve headquarters in Washington September 16, 2015. The Federal Reserve, facing this week its biggest policy decision yet under Chair Janet Yellen, puts its credibility on the line regardless of whether it waits or raises interest rates for the first time in nearly a decade. REUTERS/Kevin Lamarque
The Federal Reserve headquarters in Washington September 16 2015. The Federal Reserve, facing this week its biggest policy decision yet under Chair Janet Yellen, puts its credibility on the line regardless of whether it waits or raises interest rates for the first time in nearly a decade. REUTERS/Kevin Lamarque
The Federal Reserve headquarters in Washington September 16 2015. The Federal Reserve, facing this week its biggest policy decision yet under Chair Janet Yellen, puts its credibility on the line regardless of whether it waits or raises interest rates for the first time in nearly a decade. REUTERS/Kevin Lamarque
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