Fed keeps key interest rate steady but sees fewer risks

In this Wednesday, June 22, 2016, file photo, Federal Reserve Chair Janet Yellen testifies on Capitol Hill in Washington, before the House Financial Services Committee hearing on U.S. monetary policy. The Federal Reserve releases its latest monetary policy statement Wednesday, July 27, after wrapping up a two-day meeting.

WASHINGTON - The Federal Reserve is keeping interest rates unchanged while noting that near-term risks to the economy have diminished.

The Fed said Wednesday that the U.S. job market has rebounded, with strong job gains in June after a slump in May. But it said in a statement after its latest policy meeting that it still plans to monitor global economic threats and financial developments to ensure that they don't slow the economy.

The central bank gave no hint of when it might resume the rate hikes it began in December, when it raised its benchmark rate from a record low.

Some economists think a hike is possible in September, if hiring remains solid and the turbulence that followed Britain's vote to leave the European Union continues to stabilize.

The decision to leave its key rate unchanged in a range of 0.25 percent to 0.5 percent was approved on a 9-1 vote. Esther George, the president of the Fed's Kansas City regional bank, dissented for the third time this year, arguing for an immediate quarter-point rate hike.

The more positive tone in this statement, compared with the previous statement in April, will likely raise expectations that the central bank could be ready to boost rates at it September meeting if the economy keeps improving.

"Near-term risks to the economic outlook have diminished," the Fed said.

But it repeated a previous pledge to "continue to closely monitor inflation indicators and global economic and financial developments."

A few months ago, it was widely assumed that the Fed would have resumed raising rates by now. But that was before the U.S. government issued the bleak May jobs report and Britain's vote last month to quit the EU triggered a brief investor panic. Since then, though, a resurgent U.S. economy, the bounce-back in hiring and record highs for stocks have led many economists to predict a Fed move by December if not sooner.

In June, employers added 287,000 jobs, the most since October 2015. But uncertainty about the global economic consequences of Britain's exit from the EU remains.

In December, when the Fed raised its benchmark rate from a record low near zero, it also laid out a timetable for up to four additional rate hikes this year. But as 2016 began, intensified fears about China's economy and a plunge in oil prices sent markets sinking and led the Fed to delay further action.

Once the markets stabilized, the Fed signaled a likely rate increase by midyear. Anemic hiring in April and May, though, raised concerns, and it left rates alone. The central bank was also affected by Britain's forthcoming vote on whether to leave the EU, anticipation of which had rattled investors.

When Britain did vote to leave the union and markets sank, some economists even suggested that the Fed's next move might be to cut, rather than raise, rates. Now, though, the pendulum has swung back, especially after the arrival of a reassuring June jobs report. The Standard & Poor's 500 stock index had plunged 5.3 percent in the two trading days after Britain's vote. It has since regained all those losses - and set new highs.

The economy is also picking up after the year's anemic start. Stronger consumer spending is thought to have lifted growth, as measured by the gross domestic product from the January-March quarter to the April-June quarter, with further acceleration expected later this year. In the spring, consumers boosted spending at the fastest pace in a decade. Economists also foresee a lift from business investment, reflecting a rebound from cutbacks in the energy sector.

All that strength might argue for September rate hike, especially if monthly job growth equals as least 200,000 between now and then. Still, the risks of raising rates again too soon and possibly choking off economic activity may seem greater to the Fed than the risks of waiting longer. It has room to accelerate its rate increases if the economy were to heat up so much as to ignite high inflation.

Before Wednesday's statement was issued, according to data from the CME Group, investors foresaw only about a 27 percent probability of a Fed rate hike by September and about a 52 percent chance by December.

Text of the Fed's statement after its meeting Wednesday

WASHINGTON (AP) - Below is the statement the Fed released Wednesday after its policy meeting ended: Information received since the Federal Open Market Committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate. Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months. Household spending has been growing strongly but business fixed investment has been soft. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook have diminished. The Committee continues to closely monitor inflation indicators and global economic and financial developments. Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.