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Washington

Fed keeps rates unchanged at least until December; inflation remains soft

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A unanimous Federal Open Market Committee decided not to raise the federal funds rate on Wednesday.

The decision at the end of the two-day meeting to leave it at a range of 1% to 1.25% was made "in view of realized and expected labor market conditions and inflation," a committee statement said. The Fed's $4.5 trillion balance sheet reduction started in October.

Despite a hurricane-related drop in payroll employment in September, the unemployment rate continued to decline and business fixed investment has picked up in recent quarters, but inflation for items other than food and energy remained soft over the last 12 months, committee members noted.

At the committee's next meeting Dec. 12-13, members will present their summary of economic projections, which indicates their expectations for future rate hikes in 2018 and beyond. At their September meeting, Fed officials estimated that three quarter-point rate hikes would be appropriate next year, based on the median in the so-called dot plot of interest-rate forecasts.

"December looks bang on track for a hike," said James Athey, senior investment manager at Aberdeen Standard Investments. "As expected, nothing to see from this meeting really but the upgraded economic outlook after a hurricane-affected quarter was necessary. Next year's outlook depends somewhat on the choice of Fed chair but three hikes in 2018 should be the minimum, absent a huge negative shock," said Mr. Athey.

"We don't see the Fed getting beyond a 2% rate in 2018," said Matt Toms, chief investment officer of fixed income for Voya Investment Management, in an interview. "We think the Fed wants to get to a 2% central bank rate in as orderly a fashion as it can. That means two more hikes next year and we think they are on autopilot until 2(%)."

The only change at this latest meeting "is they are more confident in growth," Mr. Toms said. "I think it's pretty undeniable that the Fed is looking at a global growth outlook." While FOMC members did not say that asset prices are too exuberant, ahead of fundamentals, "if this continues, they may have to. We think it's worth (watching) over the next few meetings," Mr. Toms said.