The Federal Reserve has decided to keep the rate at 0.25%.
The Federal Open Market Committee voted 9-1 not to hike. The sole dissenter was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points to 0.5%.
For more on how the Fed’s decision will impact markets, read: Huge letdown from the Fed
Fed policymakers have slightly lowered their projections for growth and inflation in the next two years, an outlook that likely factored into their decision to hold off on raising interest rates.
And, for the first time, one FOMC member projected a negative interest rate in 2015 and 2016.
Economists have stated leaving the rate as is would:
- Signal that the Fed wants to wait for market turmoil to calm down
- Create relief for emerging markets
- Keep things steady, since the market has likely priced in a delayed hike
“There is nothing to be lost by way of credibility [by] waiting until a little later this year,” wrote Scotiabank economist Derek Holt in a morning note today. But he’s concerned about how an eventual rate rise will affect China. “A response to further Fed-driven strength in the USD could well be much further yuan devaluation,” he says.
The Fed also reduced its estimate for long-run unemployment to 4.9% from 5%. This suggests that it’s willing to wait for unemployment to fall further before cutting rates. Unemployment stands at 5.1%.
And Fed policymakers now see just one rate hike likely to take place this year, down from two in their previous forecast, issued in June.
The Fed now expects that its preferred measure of inflation will rise only 0.4% this year, down from 0.7% in June. Both are far from the Fed’s target of 2%.