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Fed leaves rates unchanged

Investors will have at least one more month to worry about whether the Federal Reserve is raising rates.

Investors will have at least one more month to worry about whether the Federal Reserve is raising rates.

In the face of jittery financial markets and a global slowdown, the Fed blinked on Thursday.

September was supposed to be the month the U.S. central bank finally came off its zero interest rate policy, but instead it opted to hold steady for at least one more month.

Though giving a nod to an improving economy, with expectations slightly higher for gross domestic product and lower for the unemployment rate than three months ago, the Fed said low levels of inflation remain a problem.

"The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term," the Federal Open Market Committee post-meeting statement said.

The vote to keep rates at zero saw only one dissent, from Jeffrey Lacker who wanted to raise by a quarter point—a move seen on Wall Street as a virtual lock just a month ago until markets revolted. The statement gave no indication of how close the Fed is to instituting its first rate hike since June 2006. Rates have been at zero since late 2008 when they were slashed in the midst of the financial crisis. The FOMC meets again in October then once more this year in December.

In its economic projections, Fed members showed misgivings despite improvements in a number of areas.

The Fed has what is known as a dual mandate—price stability and maximum employment. The unemployment rate, currently at 5.1%, is well below the Fed's initial 6.5% benchmark for raising rates, but inflation, at least by the FOMC's favored gauges, has remained tame.

The "central tendency" for headline inflation, as gauged by the personal consumption expenditures index, is now at just 0.3% to 0.5%, down from an already-anemic 0.6 percent to 0.8% in June. Projections for core inflation, which excludes energy and food, held steady at 1.3% to 1.4%, well below the Fed's 2% target.

Concerns over the slow pace of inflation seemed to carry the day, as members adjusted their expectations for the pace of future rate increases.

One official on the 17-member FOMC even indicated that the appropriate time for the first rate increase wouldn't be until 2017. Thirteen members still see a 2015 hike, down from 15 in June, while three anticipate a 2016 move.

On Wall Street, the Fed's deliberations have been 2015's biggest drama.

Originally expected to hike rates in March, the Fed instead held at zero due to the low inflation rate and instability in the global economy, particularly in China. Financial markets have been volatile, with the major U.S. stock indexes tumbling more than 6% in August as market participants tried to read the Fed tea leaves.

In its statement, the FOMC confirmed it "is monitoring developments abroad.

"Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term," the statement also said.

The Street has tried to read between the lines of the central bank's policy statements, public speeches and projections.

Investors have had the phrase "dot plot" injected into their vocabulary, as Fed watchers scoured the map of individual members' expectations for the funds rate in the days and years ahead. That gauge on Thursday showed a slight drop for expectations since June on the funds rate—down 0.2 percentage points to 0.4% for 2015, the same decline for 2016 to 1.4%, and down 0.3% points in 2017 to 2.6%.

Zero interest rates are a remnant of the Great Recession, during which the Fed sought to inject liquidity into a system shaken by a collapse in the financial world. In addition to the rate policy, the Fed conducted three rounds of bond buying known as quantitative easing, a program that pushed its balance sheet past $4.5 trillion and coincided with a more than 200 percent rise in the S&P 500.

However, economic gains have been harder to come by, with a senior official at the St. Louis Fed recently opining that QE did little or nothing to help the Fed achieve its goals.

The Federal Open Market Committee met Wednesday and Thursday, with markets focused on whether it would raise its key funds rate for the first time since June 2006.

Many Wall Street experts expected the U.S. central bank to hike, though traders assigned a low probability to a move. The CME FedWatch tracker gave a 23% chance for a hike based on futures trading, with the best chance, at 62%, coming in December.

After a series of cuts during the financial crisis, the Fed finally took the funds rate to zero in late 2008 and has kept it there. Along with the zero interest rate policy, or ZIRP, the Fed instituted three rounds of bond buying knowing as quantitative easing, a program that took the central bank's balance sheet past the $4.5 trillion mark.

The Fed discontinued QE in October but has kept near-zero rates in place even though the unemployment rate has tumbled to 5.1 percent, near what it considers full employment. Inflation has remained stubbornly low, with wages growing just above 2%.

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