2nd LD Writethru: U.S. Fed keeps rates unchanged, signals one rate hike by year-end

The U.S. Federal Reserve on Wednesday kept its federal funds rate unchanged amid recent weak economic data and tepid inflation, but signaled that the central bank could have one rate hike by the end of this year.

"The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives," the Fed's policy-making committee said in a statement released after its two-day meeting.

Fed governors Lael Brainard and Daniel Tarullo have both recently argued that the central bank should wait for more evidence of sustained inflation before another rate hike.

The core price index for personal consumption expenditure (PCE), the Fed's preferred indicator for gauging core inflation excluding food and energy, increased 1.6 percent in July from a year ago, still below the central bank's target of 2 percent.

"Almost since the turn of the year core inflation has been stuck at 1.5 percent with really no clear signs that it's moving up yet," said David Stockton, former Fed chief economist and senior fellow at the Peterson Institute of International Economics.

"I do think the case for patience and waiting just a bit longer is to make sure that in fact the Fed's expected return to 2 percent looks like it's actually under way," he added.

But Kansas City Fed President Esther George, Cleveland Fed President Loretta Mester and Boston Fed President Eric Rosengren all voted against the policy statement, saying they preferred to raise rates at this meeting.

The opposition underscored the intense policy debate inside the central bank and a heavily divided Fed over rate hikes.

The Fed's updated projections released Wednesday showed that policymakers expected the federal funds rate to rise to around 0.625 percent at the end of 2016, implying one rate hike this year, down from two estimated in June.

The Fed also said in the statement that near-term risks to the U.S. economic outlook "appear roughly balanced," a further sign that the central bank could raise rates by the end of this year.

The Fed will hold its next two policy meetings on Nov. 1-2 and Dec. 13-14. About 74 percent of 62 economists surveyed by The Wall Street Journal this month believed that the Fed will wait until December to raise rates.

The Fed raised its target range for the federal funds rate by 25 basis points to 0.25-0.5 percent in December last year, the first rate hike in nearly a decade.

However, a slowdown in global economy since the start of this year and other global financial risks have made Fed policymakers cautious and hold off on any further rate hikes. Endit