The Federal Reserve on Wednesday acknowledged that the U.S. economy has slowed down but provided little guidance about when it would raise interest rates again.
For now, the central bank is standing pat. In a unanimous vote Wednesday, the Fed left the range for its benchmark interest rate unchanged between 0.25 and 0.5 percent. Its official statement emphasized the resilience of the job market despite the weakened recovery and pointed out strength in consumer spending and the housing sector.
Yet broader economic growth has disappointed once more. The Fed's statement cited weak exports and inventory investment among the culprits. Low oil and commodity prices have pushed down inflation. And the central bank alluded to the volatility in financial markets but carefully avoided making any judgment calls.
The Fed is "closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook," its statement read.
U.S. stock markets dropped after the announcement, with the blue-chip Dow Jones industrial average giving up 223 points to close down 1.4 percent at 15,944.46. The Dow and the broader Standard & Poor's 500-stock index see-sawed earlier in the day, opening in negative territory but briefly turning positive before closing in the red.
The Fed has emphasized that it expects future rate increases to be "gradual," and central bank forecasts released last year suggested that meant moving once a quarter. But investor expectations for a second Fed rate hike in March are dropping. Futures markets indicate a one-in-four chance that the central bank will make a move, down from roughly even odds last year. Some analysts question whether the Fed will raise rates at all -- and even whether they might be forced to reverse course.
"As things currently stand, it seems somewhat doubtful that they will be able to squeeze in four rate hikes this year, as they had previously predicted," said Curt Long, chief economist at the National Association of Federal Credit Unions.
At issue is whether Fed officials believe turbulence in the markets reflects underlying weakness in the U.S. economy. The government on Friday is slated to release its estimate of growth for the final months of 2015. Private forecasts indicate the recovery likely slowed to an annualized growth rate of less than 2 percent, though some show it may not crack 1 percent.
Meanwhile, the global recovery appears to be stumbling. China is struggling to transition to a consumer-led economy and away from export-driven growth, upending the fortunes of countries from Australia to Zambia that had supplied its manufacturing boom. The International Monetary Fund earlier this month reduced its prediction for the pace of the world's expansion this year to 3.4 percent, down 0.2 percentage points.
"I think the Fed is on hold right now and hasn't made up its mind yet if the global market volatility and economic developments in China will herald a dramatic shift in the U.S. economic or inflation outlook," said Scott Anderson, chief economist at Bank of the West.
The Fed must also confront a stubborn shortfall in one of its central objectives: maintaining inflation of about 2 percent. In November, the latest month for which data is available, prices rose just 0.4 percent from a year earlier.
On Wednesday, the Fed said it anticipates that inflation will remain low in the short term, weighed down by falling oil and commodity prices. But it reiterated that those factors appear to be "transitory" and that it expects inflation will eventually reach its goal.
Still, the Fed said it will assess both "actual and expected progress" of inflation in setting policy -- cautionary language that suggests that the longer inflation remains below target, the more likely the Fed will have to adjust its expectations for raising rates. The Fed also updated its broader policy strategy to indicate that it would be concerned about inflation running both above and below its 2 percent goal.
"The Fed is watching and waiting," said Chris Rupkey, chief financial economist at MUFG Union Bank. "They didn't hit the panic button with the recent financial market turmoil, and there is no sign they will deviate from a gradual pace."
Fed officials have emphasized that their policy decisions will depend on the health of the recovery. If it proves stronger than expected, the central bank may raise rates more quickly than forecast. But if the economy stumbles, the Fed could draw out the process even longer.
"There is no commitment here," New York Fed President William Dudley said earlier this month. "The flow of the data ― broadly defined ― will drive our actions."