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Fed Holds Off on Interest Rate Hike, Downgrades Economic Forecast

If the Federal Reserve policymakers are correct, annual growth would be the worst since 2011.

Federal Reserve policymakers on Wednesday kept the central bank’s benchmark short-term interest rate near zero, opting against the first increase since 2006 after determining the economy still isn’t strong enough to handle it.

Fed officials sharply downgraded their economic forecast for this year. They projected the economy would grow between 1.8% and 2% this year, well below the range of 2.3% to 2.7% in its last forecast in March.

If they’re correct, annual growth would be the worst since 2011 and would be far from the breakout performance some economists had hoped for this year.

In a statement after its two-day policymaking meeting, Fed officials said the economy “has been expanding moderately” after having improved little during the first quarter.

While the housing market “has shown some improvement,” central bank policymakers said exports and investments by businesses have been soft.

Central bank policymakers were less optimistic about improvements in the unemployment rate than they were three months ago, though they noted that the pace of job gains had improved.

The Fed officials forecast the unemployment rate, which was 5.5% in May, would drop to no lower than 5.2% by the end of the year. In March, they forecast the jobless rate would drop to as low as 5% this year.

Annual inflation is expected to be between 0.6% and 0.8% this year — the same as was forecast in March. That’s well below the Fed’s 2% target.

Fed officials said energy prices “appear to have stabilized” after a steep drop starting last year pushed inflation down. And although overall price growth is expected to remain low in the near term, Fed policymakers said they expected inflation to rise gradually toward the 2% target over the medium term.

Fed Chairwoman Janet L. Yellen is scheduled to hold a news conference at 11:30 a.m. Pacific time Wednesday to discuss the forecasts and the timing of an interest rate hike.

The central bank’s benchmark federal funds rate has been near zero since December 2008 as policymakers sought to boost economic growth during and after the Great Recession by making the cost of borrowing money cheaper and increasing incentives to spend rather than save.

Fed officials had indicated in March that they could raise the rate at this month’s meeting if economic data warranted it.

Given the slow start to the year, and inflation that remains low because of the decline in oil prices, many analysts had expected the Fed would not raise rates until at least September. Some economists have said they don’t think the Fed will raise the rate until next year.But policymakers on the Federal Open Market Committee decided to wait after recent data showed the economy continued to struggle to take off. Last month, the Commerce Department downgraded its estimate of first quarter economic activity to show a 0.7% contraction that was driven in large part by unusually bad winter weather and the West Coast ports dispute.

This month, officials at the International Monetary Fund and the World Bank called on the Fed to wait until at least next year to start raising its benchmark rate out of concerns an increase could slow U.S. growth and roil the global economy.

But 15 of the 17 members of the policymaking Federal Open Market Committee still expect to raise the rate this year, the Fed said Wednesday.

Still, those officials lowered their projections for where the rate would be at the end of the year. None of the 17 policymakers expected the rate would be 1% or higher, compared with four who forecast in March that the rate would be above that level by year’s end.