The Federal Reserve has left interest rates unchanged, meeting most expectations that it would continue extraordinary efforts to simulate growth in response to market turmoil and fears about China’s economy.

The move follows weeks of angst in the stock markets about whether the Fed would proceed with its first interest-rate increase in nine years or maintain near-zero rates amid warnings that officials should hold off until conditions in the markets were less volatile.

The Fed noted the continued improvement in the US jobs market and the economy in general but expressed concern about the knock-on effect of China’s slowing growth on the domestic economy.

“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 Fed said.

Monitoring developments

The central bank said it continued to see the risks to economic outlook and employment as “nearly balanced” but added that it was “monitoring developments abroad”, a sign that the Fed is still on a state of alert over how slower growth might impinge on the US economy.

Most officials still believe it will raise rates this year, indicating that they expect their concerns about international developments to be short-lived and that they intend to proceed with long-signalled plans to raise rates after seven years of reductions following the financial crisis.

On the Fed’s policy-making committee, 13 of the 17 members expect the Fed to raise rates by at least a quarter point this year; six members of the rate-setting committee forecast an even larger increase.

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, voted to raise rates this month, the first time a member of the committee broke ranks this year and disagreed with colleagues.

“I’m not arguing that this economy is perfect by any means, but nor is it on the ropes, requiring the stimulus of low monetary policy interest rates to get it back in the ring,” said Mr Lacker, a regular dissenting voice on older decisions, in a speech on September 4th.

The committee will meet again next month and in December.

US unemployment fell to 5.1 per cent in August – down a percentage point in a year – and economic growth has accelerated but investors have suffered market losses over the past month as fears that the economic slowdown in China will hurt US companies.

‘Transitory effects’

Fed officials believe that employment levels have returned to normal and expect inflation to rise toward the 2 per cent target over the medium term as the labour market improves further and the “transitory effects” of declines in energy and import prices pass.

The central bank had been expected to raise rates already this year in what would have been the first increase since 2006, reversing a policy of flooding the country with cheap money first started in December 2008 during the financial crisis.

Sluggish inflation has complicated the timing of the Fed’s anticipated increase; the rate has been running below 2 per cent for more than three years.

The postponed move comes amid warnings from the International Monetary Fund, the World Bank, the Organisation for Economic Co-operation and Development and high- profile figures such as former US treasury secretary Larry Summers that the global economy was not ready for a rate increase.

William Dudley, president of the Federal Reserve Bank of New York, flagged the Fed’s shift in position, saying that the argument for raising rates in September had become “less compelling”.