The central bank hinted it still plans to raise rates twice this year, though it said that the slowdown in economic growth would throw cold water on the pace of tightening in the future.
The Fed said that information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labour market has slowed while growth in economic activity appears to have picked up.
"Against this backdrop, the committee decided to maintain the target range for the federal funds rate at 0.25-0.5%. The stance of monetary policy remains accommodative, thereby supporting further improvement in labour market conditions and a return to 2% inflation," it said in a statement.
The committee said it expects economic conditions to evolve in a manner that will warrant only gradual increases in the federal funds rate and that the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
“A rate rise in June has been off the cards for some time,” said Nancy Curtin, chief investment officer at Close Brothers Asset Management.
“The Fed’s hands have been tied by a combination of weak jobs data in May, triggering concerns about US economic health, and the fear of exacerbating market volatility in the approach of the EU referendum,” she said.
According to Yellen, the Fed needs to see evidence of economic strength before increasing rates. She told a news conference: "We do need to make sure that there's sufficient momentum.”
“Yellen has been crystal clear in the past that any rate rise will be data-led. This wait-and-see approach allows the Fed to see whether the recent jobs data is symptomatic of wider economic malaise in the US, or a statistical anomaly, given improving inflation and the positive recent figures in the housing market,” added Curtin.
Yellen also highlighted a potential Brexit as one of the factors in the latest decision, as the referendum would have "consequences for economic and financial conditions in global financial markets."
Nick Dixon, Aegon UK, said: “Janet Yellen is feeling the pressure on both sides of the Atlantic. Weak domestic jobs data in the US and market volatility surrounding a potential Brexit all but closed the door on a rate rise this month. Yellen has been emphasising downside risks recently which will likely limit the scope for further rate rises before the autumn.”
Following hard on the Fed’s announcement, the Bank of England also announced it had decided to hold rates steady.
The move was also unsurprising in light of next week’s EU referendum. As Alex Brandreth, deputy CIO at Brown Shipley said: “Given the gravity of the impending EU Referendum and the jitters we’ve already seen in markets, as well as the likely volatility we’ll see should the UK opt to take the exit door, it would have been a hugely bold move by Governor Carney and the MPC to have announced anything different today.
“In deciding the fate of our interest rates the MPC will continue to have an eye on multiple dials, including events beyond our shores such as the race for the White House. In essence, with so many moving parts and current levels of uncertainty, don’t expect a rate rise any time soon.”
However, Dixon added: “Positive jobs figures on Wednesday hint at an economy moving in the right direction which – coupled with a large current account deficit and sterling under pressure – could signal an inflection point in the inflation cycle. The potential for inflation to rise faster than market expectations is a significant risk and could lead to unexpected interest rate increases before the end of 2016.”