WASHINGTON -- The U.S. economy is now in its seventh-straight year of expansion. It's growing at a steady if unexciting 2.2 percent annual rate. Unemployment has sunk from a 10 percent peak to a reassuring 5.1 percent. Auto and home sales have accelerated.
Yet on Thursday, the Federal Reserve declined to lift interest rates from record lows.
The decision left some Fed watchers mystified over what the central bank needs to see to begin phasing out a policy it implemented in 2008 to help rescue a collapsing economy.
Many consumers and businesses wouldn't even likely feel the consequences of a single rate increase, at least not immediately. And Fed Chairman Janet Yellen has stressed that the Fed's rate increases would be modest and gradual.
At a news conference, Yellen declined to spell out what exactly would give the Fed enough confidence to raise the federal funds rate -- the interest that banks charge each other -- from near zero.
"I can't give you a recipe for exactly what we're looking to see," she said.
What she does see now are too many lingering risks.
Inflation is still undershooting the 2 percent target that the Fed regards as consistent with stable growth. Financial markets have turned stormy as doubts have spread about whether Chinese officials can sustain decent growth in the world's second-largest economy.
Emerging markets from Brazil to Malaysia are struggling. Europe is straining to avoid stagnation. And falling oil prices have pulled Canada -- the largest U.S. trading partner -- into recession.
The doubts remain so severe that the Fed appears to consider even a mild rate increase -- one that many economists say will barely affect most Americans -- a step too far.
Yellen signaled some concern Thursday about China's slowdown and volatile financial markets. But many economists say the Fed is paying particular attention to three key gauges in weighing whether to raise rates.
They say the Fed needs to see a stable dollar, steady oil prices and a stronger job market.
The dollar has risen 14.8 percent against a basket of currencies in the past year. This has hurt U.S. manufacturers by causing their American-made goods to become more expensive abroad. It also reduces inflationary pressures because foreign-made goods become cheaper. A stronger dollar can put inflation further below the Fed's target rate.
A barrel of oil has more than halved in value to $44.07 over the past 12 months. That decline has suppressed inflation. The Fed forecasts that its preferred inflation measure will be just 0.4 percent this year -- a fraction of its 2 percent objective. Fed officials may be reluctant to act until they believe that oil prices have bottomed.
Over the past year, employers have added 2.9 million jobs, and the unemployment rate has dropped a full percentage point to 5.1 percent. The Fed considers that level consistent with a "balanced" economy. But the hiring has yet to spur faster wage growth -- a trend that would improve people's well-being and, Yellen stressed, help inflation reach the Fed's objective.
The Fed doesn't want to assume that all three of these economic measures will naturally improve. So on Thursday, it said essentially that it needs more time before finalizing a decision.
But even by the time of the Fed's October or December meeting, the direction of the world economy might remain hazy, analysts said. China might be unable to show within a few months that it can manage a transition to slower growth now that its years of 10 percent annual gains are over. Europe might face continued softness.
"If it weren't for China and all the turmoil surrounding China, I think the Fed would have hiked rates," said Mickey Levy, chief economist for the Americas and Asia at Berenberg in New York, who has analyzed Fed policy for more than 30 years.
The focus on China comes after a market rout that wiped $5 trillion in value off the nation's stocks and after a sudden move on Aug. 11 to change its exchange rate regime, a decision that triggered the yuan's biggest depreciation in two decades and roiled global markets. The world's second-largest economy is set to grow at its slowest pace in a quarter of a century this year even after five central bank interest rate cuts and fiscal stimulus.
"China was an influence in this meeting, whereas in the past that would have been much less important," said Tai Hui, chief Asia market strategist at JPMorgan Asset Management in Hong Kong.
China affects the world more than ever before, and its influence over global markets will only increase as it approaches the U.S. economy in size. It accounted for 13.3 percent of global gross domestic product last year, from less than 5 percent a decade earlier, according to World Bank data.
"China has become a bigger and bigger part of the global economy," said David Loevinger, a former China specialist at the U.S. Treasury who is now an analyst at fund manager TCW Group in Los Angeles. "It's going to have a big impact on other economies and other countries' monetary policies."
Yellen acknowledged in her Thursday news conference that policymakers focused on China. "We reviewed developments in all important areas of the world, but we're focused particularly on China and emerging markets," she said.
She said it's still unclear how rapidly its economy will cool and how well China's government can manage that slowdown.
"The question is whether or not there might be a risk of a more abrupt slowdown than most analysts expect," she said. She also mentioned concern about the "deftness" with which policymakers were addressing the situation.
Information for this article was contributed by Josh Boak of The Associated Press and by Enda Curran and Christopher Condon of Bloomberg News.
Business on 09/19/2015