U.S. Federal Reserve keeps its key short-term rate at record low

In this Oct. 2, 2014, file photo, the statue of George Washington on the steps of Federal Hall faces the facade of the New York Stock Exchange. (AP / Richard Drew)

WASHINGTON -- The Federal Reserve is keeping its key short-term interest rate at a record low in light of a weak global economy, slower U.S. hiring and subpar inflation. But it signalled the possibility of a rate hike in December.

A statement the Fed issued Wednesday said it would monitor job growth and inflation to determine "whether it will be appropriate to raise the target range" for its benchmark rate at its next meeting.

It marked the first time in seven years of record-low rates that the central bank has explicitly raised the possibility that it could raise its key rate from near zero at its next meeting.

In a further sign that a hike could occur in December, the Fed's policymakers sounded less gloomy about international economic pressures. They removed a sentence from their September statement that had warned of global weakness stemming from a sharper-than-expected slowdown in China.

"The Fed sent its clearest signal yet that, pending decent data, it has the December meeting in its sights for the first rate hike," said Michael Feroli, an economist at JPMorgan Chase and a former Fed staffer.

Stocks initially gave up some of their early gains after the Fed's announcement but then surged at the end of trading. The Dow Jones industrial average closed up nearly 200 points, or more than 1 per cent.

Bond yields rose as traders anticipated higher U.S. rates. The yield on the 10-year Treasury note rose to 2.10 per cent from 2.04 per cent late Tuesday.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said he expects a December rate increase if the job reports for October and November improve over September, when hiring slowed.

"Some combination of payrolls, unemployment and wages signalling continued improvement will be enough," Shepherdson wrote in a note to clients.

Still, the Fed noted that the economy is expanding only modestly. And in a nod to recent weaker data, the policymakers expressed some concern about the pace of hiring.

While many Fed officials have signalled a desire to raise rates before year's end, some tepid economic reports in recent weeks had led some analysts to predict no hike until 2016.

The Fed's statement Wednesday was approved on a 9-1 vote, with Jeffrey Lacker, president of the Fed's Richmond regional bank, dissenting. As he had in September, Lacker favoured a quarter-point rate increase.

The Fed has kept the target for its benchmark funds rate at a record low in a range of zero to 0.25 per cent since December 2008. After the September meeting, Yellen noted that 13 of 17 Fed officials expected the first rate hike to occur this year. But some economic reports since then have been lacklustre, including the slowdown in job growth last month.

Some of the U.S. weakness has occurred because of a global slump, led by China, that's inflicted wide-ranging consequences. U.S. job growth has flagged. Wages and inflation are subpar. Investors are nervous. And manufacturing is being hurt by a stronger dollar, which has made U.S. goods pricier overseas.

On the other hand, the Fed said in its statement Wednesday that consumer spending and business investment have been rising "at solid rates" and that the housing market has improved further.

The Fed cut its benchmark rate to near zero during the Great Recession to encourage borrowing and spending to boost a weak economy. Since then, hiring has significantly strengthened, and unemployment has fallen to a seven-year low of 5.1 per cent.

But the Fed is still missing its target of achieving annual price increases of 2 per cent, a level it views as optimal for a healthy economy.

At the start of the year, a rate hike was expected by June. A harsh winter, though, slowed growth. And then in August, China announced a surprise devaluation of its currency. Its action rocked markets and escalated fears that the world's second-largest economy was weaker than thought and could derail growth in the United States.

Uncertainty was too high, Fed officials decided, for a rate hike in September.

Since then, the outlook has dimmed further, with lower job gains and weak retail sales and factory output. Also, inflation has fallen further from the 2 per cent target because of falling energy prices and a stronger dollar, which lowers the cost of imports.

This week's Fed meeting followed decisions by other major central banks -- from Europe to China and Japan -- to pursue their own low-rate policies. Against that backdrop, a Fed rate hike would boost the dollar's value and could squeeze U.S. exporters of farm products and factory goods by making them costlier overseas.

Congress may help if a budget deal announced this week wins congressional approval. That could avert a government shutdown and raise the government's borrowing limit -- two threats that concern Fed policymakers.

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AP Economics Writer Paul Wiseman contributed to this report.