Inflation still ebbing, Fed leaves rate near zero

Vote’s unanimous after strong dollar, oil slump keep price gains under 2%

In this Jan. 15, 2015, file photo, Federal Reserve Chair Janet Yellen, left, is acknowledged by International Monetary Fund (IMF) Managing Director Christine Lagarde, right, with British Prime Minister David Cameron, during a roundtable meeting at the IMF in Washington. Federal Reserve policymakers meet to set interest rates on Wednesday, Jan. 28, 2015.
In this Jan. 15, 2015, file photo, Federal Reserve Chair Janet Yellen, left, is acknowledged by International Monetary Fund (IMF) Managing Director Christine Lagarde, right, with British Prime Minister David Cameron, during a roundtable meeting at the IMF in Washington. Federal Reserve policymakers meet to set interest rates on Wednesday, Jan. 28, 2015.

WASHINGTON -- Federal Reserve policymakers on Wednesday kept their benchmark interest rate near zero and reiterated a plan to be patient about future increases, indicating there won't be one until at least June despite a more upbeat assessment of the U.S. economy.

In a statement after its latest policy meeting, the Fed made clear that no rate increase is imminent. Chairman Janet Yellen said after last month's meeting that by saying it would be "patient," the Fed was signaling there would be no rate increase for at least two meetings.

The Fed's statement Wednesday said the factors holding inflation below its 2 percent target rate have intensified since its last meeting in December. Inflation has stayed ultralow partly because of a plunge in energy prices and a steadily strengthening dollar.

The central bank said it thinks inflation will decline further before starting to rise gradually.

The Fed's action was approved on a unanimous 10-0 vote, marking the first unanimous decision since June. Two of the most vocal officials who have urged the Fed to move more quickly to raise rates, Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser, are not voting members of the policy panel this year.

On Wall Street, stocks fell after the Fed's statement was issued in midafternoon, though prices were also pressured by the continued fall in oil prices. The Dow Jones industrial average dropped 195.84 points, or 1.1 percent, to close at 17,191.37.

The Fed's statement strengthened its assessment about how the U.S. economy is performing, saying that the expansion was occurring at a "solid pace," an improvement from the "moderate pace" wording it had used since September. It upgraded its description of job gains to "strong" from "solid" last month. It also added that the plunge in oil prices had "boosted household purchasing power."

While the Fed did not explicitly mention the slowing global economy, it did say that it planned to take "international developments" into account in determining when to start raising interest rates.

In its discussion of prices, it said that inflation has "declined further" below the committee's 2 percent target and that this slowing was largely a reflection of falling energy prices. And it stated that inflation could slow even further in the near term before it starts rising gradually toward the Fed's preferred 2 percent pace.

The inflation comments suggest that the central bank is concerned about weak price gains, which could delay any interest rate increases. Many economists have forecast a Fed rate increase in June but some have pushed back that timetable in recent weeks.

"The change in wording on inflation is significant," said David Jones, chief economist at DMJ Advisors. "Given their concern about inflation being as low it is, it is more of a question of a hike at mid-year or the third quarter rather than one coming any earlier than that."

The Fed operates with two major goals, keeping prices rising at a moderate pace of 2 percent while promoting maximum employment.

"They made a lot of headway on the labor front but still aren't where they need to be on inflation," Ward McCarthy, chief financial economist at Jefferies LLC in New York, said before the release. "It's a mixed bag."

The U.S. economy's steady growth and a strengthening job market would normally argue for a move to begin raising rates to prevent high inflation. The Fed has kept its benchmark rate near zero since December 2008 to encourage borrowing, spending and investment and support the economy's recovery from the recession. The Fed's key rate affects rates on many consumer and business loans.

But concerns about global economic weakness and low inflation have raised doubts about when the Fed's first rate increase will occur. A growing number of economists say the date could slip to September or even later. Economists at Morgan Stanley this week pushed back their forecast for the first rate increase to March 2016 because of the factors holding inflation down.

David Mericle, an economist at Goldman Sachs, wrote last week that the deceleration of inflation is likely to continue into summer. The Fed, he said, "would find it hard to justify" a rate increase should inflation continue to fall.

"They're going to wait and they're going to be patient," said John Silvia, chief economist at Wells Fargo.

He's still expecting a rate increase in June, but said Wednesday's statement lowered the probability.

"We'd have to see some turnaround in inflation numbers, and I don't think we're going to see it that quick," Silvia said.

Information for this article was contributed by Martin Crutsinger of The Associated Press, Jeff Kerns of Bloomberg News, Binyamin Appelbaum of The New York Times and Jim Puzzanghera of the Los Angeles Times.

A Section on 01/29/2015

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