Fed Cites Global Concerns In Vote To Leave Interest Rates Unchanged

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A much anticipated Federal Reserve meeting ended today with the decision to leave interest rates unchanged. The Fed has kept short-term rates near zero for more than six years. Many people in the markets thought that era might end today. But as NPR's John Ydstie reports, developments in the global economy convinced Fed policymakers to hold off.

JOHN YDSTIE, BYLINE: Many forecasters had pointed to U.S. job growth that's averaged over 200,000-a-month for years and an unemployment rate close to 5 percent to make the case that the Fed should begin raising interest rates. But in the end, Fed officials looked beyond U.S. borders to make their decision. In a news conference, Fed Chair Janet Yellen said a continued slowdown in growth in China and other developing countries convinced Fed officials they should wait.

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JANET YELLEN: In light of the developments that we have seen and the impacts on financial markets, we want to take a little bit more time to evaluate the likely impacts on the United States.

YDSTIE: One of the biggest concerns for Fed officials is that those developments in foreign economies are pushing down inflation, which is already lower than the Fed believes is good for economic growth.

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YELLEN: We're, after all, way below our inflation target. But an important reason for that is that declines in import prices reflecting the appreciation of the dollar and declines in energy prices are holding down inflation well below our target and well below core inflation.

YDSTIE: Yellen said one important remedy for lower inflation is a tighter labor market with more people working and employers pushing up wages as they compete for workers.

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YELLEN: A tighter labor market, a labor market moving toward full unemployment, is one that historically has generated upward pressure on inflation.

YDSTIE: Yellen said the current low labor force participation rate means there are still lots of people on the sideline who would like to work. She said that probably means the current unemployment rate of 5.1 percent understates the real level of unemployment.

Yellen was also asked about one criticism from those who believe the Fed should be raising rates now. The critics argue low rates have benefited the wealthy by pushing stock prices higher and increased income inequality. She said she disagrees.

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YELLEN: To me, the main thing that an accommodative monetary policy does is put people back to work.

YDSTIE: And she said since unemployment is concentrated among the lowest-earning workers, putting people back to work is a force for reducing inequality.

Yellen was also asked whether a looming government shutdown that could come if Congress doesn't pass a budget by the end of the month had anything to do with the decision by Fed officials to hold off on a rate hike.

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YELLEN: It played absolutely no role in our decision. I believe it's the responsibility of Congress to pass a budget, to fund the government, to deal with the debt ceiling so that America pays its bills. We have a good recovery in place that's really making progress, and to see Congress take actions that would endanger that progress, I think that would be more than unfortunate.

YDSTIE: The stock market reacted positively immediately after the Fed said it would not raise rates but lost ground later in the day. The major index has ended mixed. Interest rates fell. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.