Fed leaves key rate near zero, but hints at possible December hike
Federal Reserve policymakers left the US benchmark rate at a record low, meaning global stocks fell on Thursday, however, if the US economy continues to improve they have said they will consider raising it as early as their December meeting. This is the first time that the Fed has said that they may raise the rate, policy makers are due to gather 15-16 December. With expected growth of less than 2% at an annual rate the Fed has decided to leave it the benchmark rate near zero.The benchmark interest rate has been near zero since 2008 when the Fed cut it during the recession in order to help recovery. Fed policy makers are divided over when to increase the rate, many want to wait until 2016 as they are worried that a premature move could derail recovery. 

Paul Davidson

USA TODAY

WASHINGTON— The Federal Reserve held off on raising interest rates Wednesday, but signaled a hike could come as early as December despite recent speculation that a slowing economy will prompt the central bank to wait until next year.

With job gains weakening markedly the past two months and the government expected to report third-quarter economic growth of less than 2% at an annual rate Thursday, the Fed's decision to keep its benchmark rate near zero was widely expected. The central bank hasn't lifted the rate in nearly a decade and it's been near zero since the 2008 financial crisis.

But in a statement after a two-day meeting, the Fed said, "In determining whether it will be appropriate to raise the target rate at its next meeting," the Fed will assess progress toward its goals of maximum employment and 2% annual inflation. That marks the central bank's first reference to bumping up rates at a specific meeting. Fed policymakers will gather Dec. 15-16.

Federal Reserve statement of Oct. 28, 2015

In recent weeks, financial markets and many economists have sharply reduced the odds of such a move.

But tellingly, the Fed on Wednesday suggested recent headwinds have eased. It dropped an assertion its previous statement that global and market developments "may restrain economic activity somewhat" and further suppress inflation. Instead, it simply cited global and financial developments. China's slowing economy has performed modestly better than expected recently and stocks have rallied.

The Fed also said the economy "is expanding at a moderate pace," echoing its fairly upbeat September outlook. Policymakers noted "the pace of job gains slowed" recently but added that the unemployment rate "held steady" and household spending and business investment "have been increasing at solid rates." And it added that labor market slack -- such as part-time workers who prefer full-time jobs – "has diminished since early this year."

The Fed reiterated that the risks to its outlook are "nearly balanced" and that it will boost rates when it "has seen some further improvement in the labor market is reasonably confident" inflation will drift back to its 2% goal over the medium-term.

The generally positive appraisal appeared to distinctly leave the door open to a December move.

"The Fed sent its clearest signal yet that, pending decent data, it has the December meeting in its sights for the first rate hike," economist Michael Feroli of JPMorgan Chase wrote to clients.

Before the meeting, economists said a pronounced downgrade of the Fed's forecast would signal it has all but ruled out December action. Monthly job growth slowed to an average 139,000 in August and September from upwards of 200,000 the first seven months of the year. And September retail sales were disappointing. Those reports stoked concerns that economic troubles in China and emerging markets were hobbling a previously healthy domestic economy.

Last month, the Fed passed on a rate increase, saying it wanted to assess whether the global turmoil and recent stock market volatility would affect demand in the U.S.. The overseas weakness already has strengthened the dollar, hampering manufacturers' exports, and along with low oil prices, putting further downward pressure on inflation.

The developments have led to a divide among Fed policymakers over the timing of a rate hike. Fearful of derailing the recovery with a premature move, Fed board members Daniel Tarulllo and Lael Brainard have said they're leaning toward waiting until 2016. Others, including Fed Chair Janet Yellen, have left open the possibility of a December increase, depending on the economy's progress in coming weeks. And some, such as Richmond Fed chief Jeffrey Lacker, believe policymakers already should have hoisted rates. He dissented again Wednesday.

Rate hike proponents say the U.S. economy is still on solid footing. With unemployment at a near-normal 5.1%, some economists say the slowdown in payroll growth could partly reflect the sharply reduced ranks of jobless workers. Others note that jobless claims, a reliable gauge of layoffs, have remained near prerecession lows and broader measures of the labor market are improving.

Paul Davidson on Twitter: @PDavidsonusat