Bloomberg News
 

While the U.S. retreats from its role of the world’s policeman, the Federal Reserve evidently has becoming willing to take up the mantle of central bank for the world.
 
Citing “recent global economic and financial developments,” the Federal Open Market Committee voted to maintain the near-zero interest rate policy that was put in place during the throes of the economic crisis in December 2008.
 
In so doing, the U.S. central bank evidently was in accord with major international authorities, notably the International Monetary Fund and the World Bank, which had urged the Fed not to raise its interest rate target for fear of worsening the turmoil in emerging markets.
 
The Federal Reserve did so even as it acknowledged the U.S. economy is expanding at “a moderate pace.”
 
In addition, it took note in its latest policy statement, as it did previously in late July, of “solid job gains and declining unemployment.” Indeed, last month’s jobless rate of 5.1% was just a hair above the FOMC’s year-end projection of 5.0% and its longer-run projection of 4.9%.
 
Inflation, however, continues to fall short of the Fed’s 2% target (which uses the personal consumption deflator, not the more familiar consumer price index). And the Fed sees the risks posed from abroad posing downside risks to prices and the economy. Here’s the key sentence from the FOMC statement:
 
“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.”
 
Which translates to the Fed keeping rates lower for even longer than previously projected.
 
Arguably more important than the Fed’s current unchanged interest-rate target is that its policy-setting further reduced its year-end rate outlook not only for 2015, but also for 2016 and 2017, by about a quarter percentage point each.
 
Based on the so-called dot plot graph of the projections of the members of the Fed’s Board of Governors and the 12 Fed district presidents, the median call is for just one quarter-point hike, from the current 0-0.25% range, this year. Previously, the dot plot called for two such moves before the end of 2015.
 
For 2016, the median year-end forecast of these Fed officials calls for a fed funds target of 1.5%. And for end-2017, the median forecast is 2.5%. Only by 2018 do the Fed officials see the fed funds reaching what they see as its long-run equilibrium rate of 3.5%.
 
Not only is that a long ways off, the monetary solons previously have had to rachet down their dots steadily. Indeed, four of the group of 17 (there are two vacancies among the seven Board Governors and 12 district presidents) expect no increase at all in 2015.
 
Indeed, one of the dot plotters called for a negative fed funds rate for end-2015 and 2016. Sub-zero policy rates have been adopted abroad, notably by the European Central Bank, but never by the Fed.
 
That said, one-month U.S. Treasury bill rates dipped into negative territory Thursday, an interesting curiosity. Much more important was the steep drop in the Treasury two-year note yield, the coupon security most sensitive to Fed expectations. In the wake of the Fed’s rate decision, the two-year note yield dropped to 0.69% from just over 0.80%--which doesn’t sound like much but it’s a big move when rates are close to zero. And it was the clearest indication of the market’s assessment that the Fed will be lower for longer.
 
What also should be clear is that currency exchange rates—not just interest rates, the traditional target for central banks—have become a major transmitter for monetary policies. That should not be entirely surprising in a world where the major central banks’ administered rates are at or near zero—or even below zero in some cases.
 
The dollar’s exchange rate is the purview of the U.S. Treasury, and the Fed is careful not to tread on the former’s territory. But Yellen also took note of the effect of the turmoil in currencies and global markets with regard to their impact on U.S. growth and inflation.
 
To give such high importance to events abroad is extraordinary, and perhaps without precedent.
 
It is also ironic that the U.S. central bank is taking on increased influence in international economic affairs while China, the world’s No. 2 (and ascendant) economy, is going through the throes of a significant slowdown, which is roiling many of the world’s other emerging economies, especially commodity producers. At the same time, America’s ability to influence geopolitical events has been ebbing.
 
Whatever the reason, the Fed signaled that U.S. short-term interest rates will remain historically low, even as Fed officials think the domestic economy is doing pretty well. While economists can debate the propriety of that policy, investors should incorporate that reality into their portfolio decisions.