Fed holds interest rate steady and keeps a wary eye on the economy and markets

Federal Reserve policymakers on Wednesday said that U.S. economic growth slowed late last year and that they were “closely monitoring global economic and financial developments” amid recent stock market turmoil.

As expected, Fed officials held their benchmark short-term interest rate steady at between 0.25% and 0.5% after enacting the first increase in nearly a decade last month. They offered no new hints about when the next rate change would come.

U.S. stock indexes fell sharply after investors digested the Fed’s statement. The Dow Jones industrial average ended down 223 points, or about 1.4%, at 15,944.46.

Members of the policymaking Federal Open Market Committee were somewhat less optimistic about the state of the U.S. economy than they were last month.

But the group said it expected that with “gradual adjustments” to interest rates, “economic activity will expand at a moderate pace” in the U.S. and the labor market would continue to strengthen.

The six-paragraph policy statement released after the Fed’s two-day meeting didn’t indicate the same level of concern about global conditions that officials expressed in September after a similar tumultuous stretch of stock market sell-offs.

In its September statement, Fed policymakers warned that “global economic and financial developments may restrain economic activity somewhat” and were likely to put more downward pressure on low inflation.

Those concerns led central bank officials to delay a long-awaited increase in the so-called federal funds rate. With major stock indexes in the U.S. down significantly since the start of the year, analysts wondered whether the Fed would include similar language in Wednesday’s statement to try to calm investors.

Instead, the statement, approved in a 10-0 vote, said the committee was “closely monitoring global economic and financial developments” and was “assessing their implications for the labor market and inflation.”

Future interest rate changes would depend in part on “readings on financial and international developments,” according to the statement.

Michael Gapen, head of U.S. economic research for banking firm Barclays, said he expected Fed policymakers to acknowledge the economic slowdown and market volatility — even as they left their options open for a rate increase at their next meeting in March.

“Markets may have wanted to hear something more dovish,” he said, using a term that refers to a less aggressive stance on raising interest rates.

Gapen said Wednesday’s statement didn’t change his forecast for a rate bump in March, although that will depend on an easing of market turmoil and satisfactory economic data.

He found it significant that the central bank’s statement, which usually begins with a sweeping assessment of economic growth, led off by lauding the continued improvement in the labor conditions.

But Jia Liu, a research fellow at the American Institute for Economic Research in Great Barrington, Mass., said an interest rate increase in March “has become unlikely.”

Still, there’s a lot of time before the Fed has to make a decision, said Chris Rupkey, chief financial economist at Union Bank in New York.

“They didn’t hit the panic button with the recent financial market turmoil, and there is no sign they will deviate from a gradual pace,” he said.

In December, Fed policymakers nudged up the central bank’s benchmark short-term interest by 0.25 of a percentage point, ending an unprecedented seven-year stretch of keeping the rate near zero. In their economic projections last month, a majority of the Fed’s 17 policymakers anticipated four 0.25 percentage point increases this year. That would put the rate at about 1.4% by the end of 2016.

jim.puzzanghera@latimes.com

don.lee@latimes.com