WASHINGTON (AP) - The Federal Reserve is keeping its key interest rate unchanged but signaling it will likely raise rates before year's end.
The Fed said in a statement ending its latest policy meeting Wednesday the U.S. job market has continued to strengthen and economic activity has picked up. But it noted business investment remains soft and inflation too low and it wants to see further improvement in the job market.
The central bank characterized the near-term risks to its economic outlook as "roughly balanced." It was the first time it has used that wording since late last year, when it most recently raised rates. Most analysts have said they think the Fed will next raise rates in December.
The Fed said its policy committee had concluded "the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives."
"The Fed appears to be firmly on track for a December hike," Paul Ashworth, chief US economist at Capital Economics, said after the statement was issued.
U.S. stocks climbed Wednesday as investors were relieved by the announcement, which sent dividend-paying stocks higher, while energy companies jumped with the price of oil.
With the central bank confirming it will raise interest rates slowly, bond yields dropped and utility and phone companies rose. The price of oil rose after the U.S. government said energy stockpiles shrank last week.
The Dow Jones industrial average added 163.74 points, or 0.9 percent, to 18,293.70. The Standard & Poor's 500 index picked up 23.36 points, or 1.1 percent, to 2,163.12. The Nasdaq composite rose 53.83 points, or 1 percent, to a record 5,295.18.
In her news conference, Yellen offered a simple explanation for why the Fed didn't raise rates: The economy can still grow without hurting itself.
The Fed chair noted historically low rates haven't caused the economy to overheat as some analysts feared they would. Steady job gains have pulled discouraged workers back into the job market and yet inflation remains below the Fed's 2 percent target rate.
"The economy has a little more room to run than previously thought," Yellen said.
Indeed, the Fed made clear in updated forecasts it issued Wednesday it expects growth to remain tepid for the next three years.
It expects the economy to expand just 1.8 percent this year and by an almost equally sluggish 2 percent in both 2017 and 2018.
The policymakers also forecast inflation will nearly reach the Fed's target next year before achieving 2 percent in 2018 and 2019. Inflation has remained below that level for more than three years.
For the first time in nearly two years and for the first time since Yellen became Fed chair in February 2015, there were three dissents to the Fed's statement.
The three officials are all presidents of regional Fed banks - Esther George of Kansas City, Loretta Mester of Cleveland and Eric Rosengren of Boston. All wanted the Fed to raise its key rate at this meeting.
"This seems to have been one of the most divisive FOMC meetings in recent memory," Ashworth said.
The Fed's next meeting is just a week before the November elections, and most analysts think it wouldn't want to raise rates so close to when voters go to the polls.
That's why the last meeting of the year in December is seen as the most likely time for the next rate hike as long as the economy keeps improving in line with the Fed's expectations.
In its updated forecasts, the Fed lowered its expectation for the long-range level of its benchmark interest rate to 2.9 percent from 3 percent in June and 3.5 percent before then.
Until recently, many Fed watchers had thought a rate hike was likely this week. They believed the Fed, starting with a late-August speech by Yellen in Jackson Hole, Wyoming, was preparing investors for an imminent increase.
Other Fed officials, including Vice Chairman Stanley Fischer, made similar observations, seemingly part of a collective signal a September rate hike was probable if not definite.