Fed notes better economy, takes no policy action
WASHINGTON (AP) — The Federal Reserve sketched a mildly brighter view of the economy Tuesday after a burst of hiring since its last meeting in January. It took no further steps to aid the recovery and repeated its plan to keep short-term interest rates near zero through 2014.
After a one-day policy meeting, the Fed said unemployment should continue to decline gradually as the economy expands moderately. It also noted that consumer spending and business investment have picked up.
And the Fed took a more hopeful view of Europe's debt crisis. Though the crisis still threatens the global economy, the danger has eased, the Fed said.
The policymakers cautioned that rising oil and gas prices will raise inflation temporarily. But they said longer-term inflation should remain stable — repeating a view expressed by Fed Chairman Ben Bernanke earlier this month.
The statement was approved on a 9-1 vote. Atlanta Fed President Jeffrey M. Lacker dissented for the second straight meeting. The statement said Lacker doesn't "anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014."
"We are in a holding pattern that is likely to persist not only at the (Fed's) April meeting but for several meetings beyond that," said David Jones, chief economist at DMJ Advisors. "The Fed wants to be sure of the economic trajectory before they make any further moves."
Stocks held their early gains. The Dow Jones industrial average was up 110 points before the Fed statement and stayed at that level shortly after the statement was released. Within 15 minutes, stocks had dropped back to roughly where they were before the Fed's announcement.
Since the Fed's last meeting in late January, a stream of positive economic reports has suggested the economy is faring better than the Fed had expected.
Employers added 734,000 jobs from December through February, the best three months of hiring in two years. The unemployment rate has declined to 8.3 percent.
Consumers are more confident and have stepped up spending. Auto sales are rising. And the stock market keeps climbing.
Despite the brightening prospects, unemployment remains historically high — something Bernanke mentioned in testimony to Congress last month, when he said, "The job market remains far from normal."
Bernanke also said consumer spending and confidence remain less than healthy, inflation-adjusted pay gains are low and credit is still tight for many. As long as they are, Bernanke suggested, unemployment might not fall much further.
Bernanke's comments and remarks from other Fed officials suggest that the Fed plans to maintain its efforts to keep rates low to fuel growth.
Low rates are intended to encourage consumers and businesses to borrow and spend more. Lower yields also lead some investors to shift money out of bonds and into stocks.
Most economists don't think the Fed will retreat anytime this year from its late-2014 target for any rate increase. Some note that threats to the economy remain from Europe's debt crisis and the run-up in gasoline prices.
Eventually, the Fed will feel compelled to raise rates to curb inflation as the economy heats up. But some analysts think the Fed is reluctant to signal an eventual shift toward higher rates before it's close to a change. Signaling a change too soon might cause investors to push interest rates up before the Fed is sure the economic recovery will last.