Economy picking up, but recovery with job growth could take time
By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) - The U.S. economy is picking up strength, but the Federal Reserve promised again on Wednesday to keep interest rates exceptionally low for an extended period because it expects only a weak recovery.
After a two-day closed-door meeting, Fed policymakers made only small changes to their statement, which is carefully picked apart for clues about what the Fed might do, and when.
Analysts said the statement fit with expectations that an interest rate hike is many months away. As expected, the central bank's Federal Open Market Committee kept its target for its federal funds rate set at a range of zero to 0.25%.
The FOMC repeated that it "continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
Super low rates are needed because of "low rates of resource utilization, subdued inflation trends, and stable inflation expectations," the Fed said in a new formulation of its key forward-looking statement.
Tony Crescenzi, senior vice president at Pacific Investment Management Co, said these are three conditions that market participants can use to gauge Fed policy with better precision.
The Fed said it would purchase less debt from federal housing agencies than it had previously planned. The Fed said it would buy $175 billion of agency debt, down from prior plans to purchase $200 billion, in part because of 'the limited availability of agency debt."
"This statement supports the view that the Fed has absolutely no intention of raising rates for a long while," wrote John Ryding of RDQ Economics in a note to clients.
The vote by the committee was unanimous. Read full FOMC statement.
The dollar (DXY 75.87, +0.23, +0.30%) came under renewed selling pressure following the Fed statement and the stock rally (INDU 9,802, +30.07, +0.31%) briefly lost steam. Short-term Treasury prices pared a decline. Yields on 2-year notes (UST2YR 0.89, -0.01, -1.33%) were little changed.
In an interview, former Fed Gov. Susan Phillips said the FOMC statement was "more positive on the economy front."
The statement said that household spending appears to be expanding. In September, the Fed said only that such spending had stabilized.
Economists expect the Fed to hold interest rates close to zero until sometime in 2010. Some see no action at all until 2011.
The economy grew at a 3.5% annual pace in the third quarter, the fastest pace in two years, but the Fed was unconvinced that a sustainable recovery was under way.
The economy "is likely to remain weak for a time," the statement said.
There was no concern about higher inflation in the statement. The FOMC repeated that inflation is expected to "remain subdued for some time."
