Fed keeps rates unchanged, wary eye on global markets

The Janet Yellen-led US Federal Reserve, has signalled it wasn't ready to abandon its plan to tighten monetary policy

The US Federal Reserve kept interest rates unchanged on Wednesday and said it was “closely monitoring” global economic and financial developments, signalling it had accounted for a stock market selloff but wasn’t ready to abandon a plan to tighten monetary policy this year.

The decision by the central bank’s rate-setting committee was widely expected after a month-long plunge in US and world equities raised concerns an abrupt global slowdown could drag on US growth.

Fed policymakers said the economy was still on track for moderate growth and a stronger labour market even with “gradual” rate increases, suggesting its concern about global events had diminished but not squashed chances of a rate hike in March.

“The committee is closely monitoring global economic and financial developments and is assessing their implications for the labour market and inflation,” the Fed said in its policy statement following a two-day meeting.

Wall Street fell after the statement, with the Standard & Poor’s 500 index closing down more than one per cent. Prices for US Treasuries were mixed, while the dollar extended losses against a basket of currencies.

In an indication the Fed was taking global risks seriously, a prior reference to the risks to the economic outlook being “balanced” was removed from its statement. Instead, it said it was weighing how the global economy and financial markets could affect the outlook.

“It is clear that several FOMC members have become more worried,” said Harm Bandholz, an economist at Unicredit in New York, referring to the Fed’s rate-setting Federal Open Market Committee.

Shrugging off economic weakness in China, Japan and Europe, the Fed last month raised its key overnight lending rate by a quarter point to a range of 0.25 percent to 0.50 percent and issued upbeat economic forecasts that suggested four additional hikes this year.

Manufacturing down, jobs up
New orders for long-lasting manufactured goods in December recorded their biggest drop in 16 months, the latest indication that US economic growth braked sharply at the end of 2015. The Commerce Department said durable goods orders plunged 5.1 per cent last month, the biggest drop since August 2014, after slipping 0.5 per cent in November. The decline was generally broad-based, with orders for transportation equipment plunging 12.4 per cent and bookings for non-defence aircraft plummeting 29.4 per cent.

The Labor Department said initial claims for state unemployment benefits fell 16,000 to a seasonally adjusted 278,000 during the week ended January 23. The drop, which exceeded economists’ expectations for a fall of 282,000, almost reversed the prior two weeks’ increases.