Fed held off on rate hike due to China

Federal Reserve officials were almost ready to raise interest rates in September but held off because of China's economic slowdown and its potential to derail US growth and inflation.

Minutes of the Sept. 16-17 discussions released on Thursday showed the central bank believed the time for the first Fed rate increase in nine years "might be near."

However, policymakers decided to wait for evidence that the economy had not weakened and that inflation would gradually move back toward the Fed's 2 percent annual target. Some members also expressed concerns that a premature rate hike could harm the central bank's credibility.

The minutes showed Fed officials were concerned that "a material slowdown in economic growth in China and potential adverse spillovers to other economies were likely to depress US net exports to some extent." The result has been a stronger dollar, which could hurt US exports and push oil prices lower.

The International Monetary Fund on Tuesday predicted that China's slowdown and tumbling commodity prices will push global economic growth this year to the lowest level since the recession year 2009. In an updated outlook, the IMF said the world economy will grow 3.1 percent this year, down from a July forecast of 3.3 percent and from 3.4 percent growth last year.

China's economy has slowed for four straight years, from 10.6 percent in 2010 to 7.4 percent last year

The September meeting had been preceded by weeks of speculation over whether the Fed would vote to raise rates. Fed Chair Janet Yellen told reporters at a news conference following the meeting that a rate hike was still likely this year.

But since then, the government has released economic data that could give Fed officials further pause.

Employers added just 142,000 jobs in September, and officials lowered their estimate of job gains in July and August by a combined 59,000. That left monthly job growth at a mediocre 167,000 in the July-September period, down from 231,000 in the previous quarter.

The Fed's two final meetings of this year will take place on Oct. 27-28 and Dec. 15-16.

Many economists believe the weak jobs report has eliminated the possibility of a rate hike at the next meeting. Some think the Fed could end up waiting until next year to begin raising rates.

The Fed has kept its benchmark rate at a record low near zero since December 2008. It has not raised rates since June 2006.

A stronger dollar and lower oil prices would make it harder for the Fed to achieve its inflation target. Inflation has run below 2 percent for more than three years, rising by just 1.3 percent in 12 months.

The minutes of the Fed's September meeting showed that some officials worried that if the Fed raised rates in September and the economy got worse, it could harm the bank's credibility by raising questions on its commitment to its inflation target.

Officials also noted that the Fed's policy tools were better able to deal with an unexpected jump in inflation than it could deal with inflation falling. The Fed can handle higher inflation by raising interest rates. But with rates near zero, its ability to deal with further declines in inflation would be more limited.