Fed keeps rates unchanged, says risks to outlook reduced

By Lindsay Dunsmuir and Howard Schneider

WASHINGTON (Reuters) - The Federal Reserve left interest rates unchanged on Wednesday but said near-term risks to the U.S. economic outlook had diminished, opening the door to a resumption of monetary policy tightening this year.

The U.S. central bank said the economy had expanded at a moderate rate and job gains were strong in June. It added that household spending also had been "growing strongly," and pointed to an increase in labour utilization.

While Fed policymakers said they continued to closely monitor inflation data and global economic and financial developments, they indicated less worry about possible shocks that could push the U.S. economy off course.

"Near-term risks to the economic outlook have diminished," the Fed's policy-setting committee said in its statement following a two-day meeting in which it left its benchmark overnight interest rate in a range of 0.25 percent to 0.50 percent.

It noted, however, that inflation expectations were on balance little changed in recent months.

The Fed has held steady on rates since December, when it raised them for the first time in nearly a decade and signalled another four rate increases were in the offing for 2016.

That was scaled back to two hikes this year after central bank policymakers issued new projections in which they also lowered their longer-term growth estimates for the U.S. economy. The Fed is most likely to wait until December to raise rates, according to a Reuters poll of economists.

Wednesday's decision had little impact on financial markets with stocks, bonds and currencies all holding close to their levels prior to the Fed's statement.

"It sounded a reasonably upbeat tone, not a big difference from last time, but a reasonably upbeat tone," said Kathy Jones, chief fixed income strategist at Charles Schwab and Co.

ONE DISSENT

Despite a strong rebound in job growth last month and an economy near full employment, most Fed policymakers had urged caution in raising rates until there was concrete progress in moving inflation toward the central bank's 2 percent target.

The Fed's preferred inflation rate currently stands at 1.6 percent and has been below target for more than four years.

A global economic slowdown, financial market volatility and uncertainty over the impact of Britain's June vote to leave the European Union have repeatedly forced the Fed to delay another rate increase.

The U.S. economy, however, has suffered little initial impact from the so-called 'Brexit' vote. A string of better-than-expected economic data recently as well as an easing in financial conditions also have calmed nerves.

There are three more Fed policy meetings left this year - in September, November and December. A rate hike in November is generally seen as unlikely because that meeting would occur a week before the U.S. presidential election.

Fed officials will now turn their attention to this Friday's first initial estimate of second-quarter GDP, which is expected to show a healthy rebound from the previous quarter.

Kansas City Fed President Esther George was the only policymaker to dissent at this week's meeting. She has favoured raising rates at three of the last four meetings.

(Reporting by Lindsay Dunsmuir, Howard Schneider and David Chance; Editing by Paul Simao)