The US Federal Reserve has kept interest rates unchanged at zero-0.25 per cent in a nod to concerns about a weak world economy, but has left open the possibility of a modest policy tightening later this year.

In what amounted to a tactical retreat, the US central bank said an array of global risks and other factors had convinced it to delay what would have been the first rate hike in nearly a decade.

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Federal Reserve chairwoman Janet Yellen announced the result on Friday morning (AEST). Photo: Getty

“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the Fed said in its policy statement following the end of a two-day meeting.

It added that the risks to the US economy remained nearly balanced but that it was “monitoring developments abroad”.

However, the central bank maintained its bias towards a rate hike sometime this year, while lowering its long-term outlook for the economy.

Federal Reserve chairwoman Janet Yellen held a press conference following the two-day meeting to elaborate on the decision.

“The unemployment rate has declined and overall labour market conditions have continued to improve,” Ms Yellen said.

“Inflation, however, has continued to run below our longer-run objective, partly reflecting declines in energy and import prices.”

She added: “While we still expect that the downward pressure on inflation from these factors will fade over time, recent global economic and financial developments are likely to put further downward pressure on inflation in the near term.”

“These developments may also restrain US activities somewhat, but have not led at this point to a significant change in the committee’s outlook for the US economy.”

Markets react with volatility

Markets lurched in both directions. Photo: Getty

The Australian dollar staged a short-lived rally after the Federal Reserve decision.

In the hour following the  announcement, speculators drove up the value of the Aussie currency by more than a cent to a morning peak of 72.75 US cents.

However, the local currency has since lost momentum and fallen back to 71.82 US cents.

Most currency economists are forecasting that the Aussie will fall to as low as 65 US cents over the next 12 months because the collapse in commodity prices will undermine Australia’s international trading position.

In the US, the Dow and S&P 500 fell while the Nasdaq advanced slightly in a choppy session.

At the closing bell on Thursday, the Dow Jones Industrial Average stood at 16,676.28, down 63.67 points (0.38 per cent).

The broad-based S&P 500 fell 5.04 (0.25 per cent) to 1,990.27, while the tech-rich Nasdaq Composite Index added 4.71 (0.10 per cent) at 4,893.95.

Markets lurched in both directions at times, at one point lifting the S&P 500 above 2,020 before retreating again.

World oil prices dipped as well.

The US benchmark West Texas Intermediate for October delivery slipped 25 cents to $US46.90 a barrel on the New York Mercantile Exchange.

Several European stock markets also closed flat.

London’s FTSE 100 index dropped 0.68 per cent to close at 6,186.99 points, despite official data showing British retail sales rose 0.2 per cent in August from July.

In the eurozone, the CAC 40 in Paris lifted a slight 0.20 percent to finish at 4,655.14 points, while Frankfurt’s DAX 30 edged up a mere 0.02 per cent to 10,229.58 points compared with Wednesday’s close.

Meanwhile in Asia, equities mostly rose on Thursday, with traders broadly optimistic over the rate call.

Most policymakers expect 2015 rate rise

After nine years of no increases, analysts expect a hike in the near future. Photo: Getty

Fresh economic projections showed 13 of 17 Fed policymakers still foresee raising rates at least once in 2015, down from 15 at the last meeting in June.

Four policymakers now believe rates should not be raised until at least 2016, compared to two who felt that way in June.

The Fed has policy meetings in October and December.

In deciding when to hike rates, the Fed repeated it wanted to see “some further improvement in the labour market,” and be “reasonably confident” that inflation will increase.

Taken as a whole, the latest Fed projections of slower GDP growth, low unemployment and still-low inflation suggest concerns of a so-called secular stagnation may be taking root among policymakers. One policymaker even suggested a negative federal funds rate.

The median projection of the 17 policymakers showed the Fed expects the economy to grow 2.1 per cent this year, slightly faster than previously thought. However, its forecasts for GDP growth in 2016 and 2017 were downgraded.

Policymakers also forecast inflation to creep only slowly towards the Fed’s 2 per cent target even as unemployment dips lower than previously expected. They now expect the unemployment rate to hit 4.8 per cent next year, remaining at that level for as long as three years.

The Fed’s projected path of interest rates shifted downward, with the long-run federal funds rate now seen at 3.5 per cent, compared to 3.75 per cent at the last policy meeting.

The vote on the policy statement was a sign of how China’s economic slowdown and market slide left Fed officials unnerved about the state of the world economy. Only Richmond Fed president Jeffrey Lacker dissented.

In recent months, Fed officials like board member Jerome Powell and Atlanta Fed president Dennis Lockhart had publicly endorsed a September rate hike, forming a near majority along with longstanding inflation hawks like Mr Lacker.

In the end, however, they were left with a muddled picture marked by low US unemployment and steady economic growth, but no sign inflation had begun to rise towards the Fed’s target.

—with George Lekakis and agencies