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The US Federal Reserve kept interest rates unchanged on Thursday in a bow to worries about the global economy, financial market volatility and sluggish inflation at home, but left open the possibility of a modest policy tightening later this year. In what amounted to a tactical retreat, Fed Chair Janet Yellen said in a press conference that developments in a tightly linked global economy had in effect forced the US central bank's hand.

The US economy has been performing well enough to perhaps justify a rate hike "and we expect it to continue to do so," Yellen said shortly after the Fed's policy-setting committee released its latest statement following a two-day meeting. But Yellen added that "the outlook abroad appears to have become less certain," driving down US equity prices, pushing up the dollar, and tightening financial conditions in a way that may slow US growth regardless of what the Fed does.

"In light of the heightened uncertainty abroad ... the committee judged it appropriate to wait," Yellen said. "Given the significant economic and financial interconnections between the US and the rest of the world, the situation abroad bears close watching."

The policy statement also nodded squarely to international events as a decisive variable within Yellen's "data-dependent" Fed. "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 statement said.

However, the Fed maintained its bias towards a rate hike sometime this year, while lowering its long-term outlook for the economy. Fresh economic projections showed 13 of 17 Fed policymakers foresee raising rates at least once in 2015, down from 15 at the last meeting in June. Four policymakers now say 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 labor market," and be "reasonably confident" that inflation will increase. The dollar fell against a basket of currencies after the release of the statement, trading about 1 percent lower against the euro. Stocks initially edged higher before turning lower in choppy trade, while prices for US Treasuries rose.

Copyright Reuters, 2015

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