Federal Reserve leaves rates unchanged, holds off on tapering stimulus

The Federal Reserve on Wednesday left its key benchmark lending target, the fed funds rate, unchanged at 0.25% and kept its USD85 billion monthly asset-purchasing program in place. 

The Fed said the economy was showing signs of improvement though it still faced enough headwinds to prompt monetary authorities to hold off on tapering its asset purchases, which weaken the dollar to spur recovery. 

The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, was down 0.91% at 80.56. 

The news surprised many investors who were expecting the Fed to trim its monthly asset purchases by USD10 billion or even more.

The Fed said in a statement that household spending and business fixed investment have improved, while the housing sector has been strengthening as well.

However, mortgage rates have risen, while U.S. fiscal issues are restraining economic growth.

"Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy," the Fed said. 

"However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," the Fed said, adding it would continue to buy USD40 billion a month in mortgage-backed securities and USD45 billion in longer-term Treasury securities.

"Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate."

The Fed adheres to a dual mandate of keeping inflation rates in comfort zones while keeping unemployment rates at optimal levels.

The Fed added it would keep the fed funds rate at current levels as long as unemployment rates remain above 6.5% and while inflation projections do not threaten to rise more than a half percentage point above the 2% percent longer-run goal.

The U.S. unemployment rate currently stands at 7.3%.

The institution added that despite fluctuations in energy prices, inflation continues to run below longer-run objectives though longer-term inflation expectations remain stable.