The Federal Reserve on Wednesday expressed growing confidence that an economic recovery was building, even though it stuck to its commitment to keep borrowing costs near zero for "an extended period."
As expected, the central bank closed out a two-day meeting with a decision to keep benchmark overnight interest rates in a range of zero to 0.25 percent. The vote was unanimous.
In a statement announcing the decision, the Fed said the economy had "continued to pick up" since its last meeting in September, but it expressed concern that the economy’s recovery was likely to be muted.
"Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit," it said. While still emphasizing risks, the Fed was a bit more upbeat than it was in September, when it had simply said spending was "stabilizing."
In another shift, it said it would buy only about $175 billion of debt issued by government-backed mortgage finance agencies, down from the up to $200 billion it had planned to purchase, citing limited availability of the paper. The Fed has been buying mortgage-related debt to help keep home mortgage borrowing costs low.
Stock prices nationwide were higher mid-afternoon after the Fed statement, with the Dow Jones industrial average and S&P 500 stock index were both up more than 1.0 percentage point. Data published earlier on Wednesday, showing activity in the services sector nationwide continuing to expand and job losses continuing to decline also supported stock prices. .
Federal government debt prices rose sharply, while interest rate futures turned higher as traders cut bets that the Fed would soon step back from its easy money policy. The U.S. dollar fell against the euro.
"I would say there are no surprises at all. If there is any surprise, it sounds like there is not even any hint that they are going to raise rates soon," said Robert MacIntosh, chief economist at Eaton Vance Corp in Boston. "We’ve got a number of Fed meetings to go before we will get any kind of increase."
The Fed was more explicit than it had been about why it expects to be able to keep overnight rates "exceptionally low" for a long time, citing "low rates of resource utilization, subdued inflation trends, and stable inflation expectations."
The central bank, wary of undercutting the fragile recovery by withdrawing its monetary support too soon, has also been on guard for any indication that its emergency lending efforts could fuel an unwelcome bout of inflation down the road.
But top Fed officials, including Chairman Ben Bernanke, have said the recession, the most painful since the 1930s, has left a legacy of high unemployment and idle factories that should keep price pressures in check.
A private report on Wednesday showing companies nationwide cut payrolls at the slowest pace in more than a year may add to a sense that the economic numbers are moving in the right direction.
However, while the government on Friday is expected to report that the drop in employment is abating, the jobless rate is forecast to rise to a fresh 26-year high of 9.9 percent.
The world’s largest economy grew at a faster-than-expected 3.5 percent annual rate in the third quarter, which effectively signaled the end of the downturn.
Suggesting further momentum, data on Monday showed manufacturing activity hit its highest level in 3-1/2 years last month, though a report on Wednesday showed the nation’s vast services sector was growing only modestly.
In an act demonstrating confidence in the economy’s prospects, billionaire investor Warren Buffett on Tuesday said his company, Berkshire Hathaway Inc., agreed to purchase the nation’s largest rail company, saying it is poised to benefit from the recovery.
While the economic outlook has improved, unemployment is expected to climb into next year. In addition, the banking system is still under pressure from loan losses, and credit remains tight.
Most analysts at top banks nationwide have been expecting the Fed to keep interest rates on hold until mid-2010 or later.
Even before it raises rates, the central bank is expected to begin to withdraw some of the enormous amounts of cash it pumped into the economy after chopping rates to near zero. That withdrawal of liquidity from the financial system is seen as key to containing inflation risks.
Other central banks are also wrestling with how best to spur economic growth and when to withdraw extraordinary measures to support their economies.
The European Central Bank is expected to keep rates on hold at a record-low 1.0 percent on Thursday, while there is a good chance the Bank of England will expand its large asset purchase program at a meeting the same day.
