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Fed keeps key rates unchanged; foresees fewer hikes in 2016

Federal Reserve Chairwoman Janet Yellen | AP Photo

WASHINGTON — The Federal Reserve is keeping a key interest rate unchanged in light of global pressures that risk slowing the U.S. economy.

As a result, Fed officials expect to raise rates more gradually this year than they had envisioned in December. The officials now foresee two, rather than four, modest increases in their benchmark short-term rate during 2016.

The Fed said Wednesday that the economy has continued to grow moderately but that the global economy and financial markets still pose risks. Offsetting the threats, the Fed said in a statement after a policy meeting that it foresees further strengthening in the job market.

At a news conference, Chairwoman Janet Yellen said the Fed expects inflation, which has stayed persistently low, to reach the central bank’s 2 percent target in two to three years.

Stock investors seemed pleased by the Fed’s expectation of a more gradual pace of rate increases. The Dow Jones industrial average, which had been up slightly before the Fed’s statement was issued, closed up 75 points. The yield on the 10-year Treasury note fell to 1.92 percent from 1.97 percent.

Since raising its key rate from a record low near zero in December, the Fed has held off on raising rates again in the face of market jitters and a sharp slowdown in China. Resuming its rate hikes too soon could slow growth or rattle investors again.

In her news conference, Yellen suggested that sluggish wage growth showed that many more Americans may be available and willing to work even though the unemployment rate has reached an eight-year low of 4.9 percent. If employers perceive many candidates for job openings, they don’t need to offer much higher pay to attract job seekers.

“I’m somewhat surprised we’re not seeing more of a pickup in wage growth,” Yellen acknowledged.

The Fed is also waiting for consumer spending to pick up, which could happen if Americans spend more of their savings from lower gas prices. This week, the government said that retail sales slipped in February and that Americans spent less in January than it had previously estimated. The report suggested that consumers remained cautious about spending despite a solid job market and lower gas prices.

The Fed’s decision Wednesday was approved 9-1, with Esther George, president of the Fed’s Kansas City regional bank, dissenting. The statement said George favored a quarter-point rate hike now. The Fed’s updated forecasts, pointing to expectations of two rate hikes this year, are based on responses from all 17 officials who take part in the discussions, not just the 10 who vote at each meeting.

BY MARTIN CRUTSINGER, AP Economics Writer