Fed nods to better economy, mum on next move

WASHINGTON Wed Mar 14, 2012 2:35am IST

The Federal Reserve Building is reflected on a car in Washington September 16, 2008. REUTERS/Jim Young/Files

The Federal Reserve Building is reflected on a car in Washington September 16, 2008.

Credit: Reuters/Jim Young/Files

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WASHINGTON (Reuters) - The U.S. Federal Reserve on Tuesday provided few clues on the prospects for further monetary easing, offering just a slight upgrade to its economic outlook while restating concerns about the high level of unemployment.

The central bank said it expects "moderate" growth over coming quarters with the unemployment rate declining gradually; in January, it said it expected "modest" growth.

It also said a recent spike in energy costs would likely push up inflation, but only temporarily. Over a longer stretch, the Fed said inflation would likely run at or below the its 2 percent target.

"Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated," the central bank said in a statement after a one-day meeting.

U.S. stocks held gains after the statement and moved higher on news JPMorgan Chase (JPM.N) would increase its dividend.

The dollar, meanwhile, hit a fresh 11-month high against the yen, and prices for U.S. government bonds slipped as traders trimmed bets on further bond-buying, or quantitative easing, from the Fed.

"The statement ... reflects a further decrease in the odds of further quantitative easing resulting from better recent data," said Troy Davig at Barclays Capital in New York.

In a further nod to a somewhat brighter outlook, policymakers said financial market strains from the European sovereign debt crisis had eased, although they continued to pose "significant" risks. The policymakers also characterized business investment as rising; in January, they noted it had slowed.

As widely expected, the Fed reiterated its expectation that overnight interest rates would remain near zero until at least through late 2014 and that it would continue its program to reweight its portfolio toward longer-term securities. That program, known as "Operation Twist," expires at the end of June.

Richmond Federal Reserve Bank President Jeffrey Lacker dissented against the decision because he did not expect economic conditions to warrant ultra-low rates until late 2014. In January, he had dissented against the decision to offer a time frame for the first expected rate hike.

The Fed cut overnight interest rates to near zero in December 2008 and has since bought $2.3 trillion in bonds to boost growth. Financial markets are trying to gauge whether policymakers may take fresh steps to stimulate the economy in coming months.

EASING AHEAD?

A quickening in the pace of U.S. jobs growth and a sharp drop in the unemployment rate to 8.3 percent from 9.1 percent in August has led some analysts to rein in their expectations for a further easing of monetary policy.

A report on Tuesday showed retail sales posted their largest gain in five months in February, the latest data to suggest the economic recovery is on a more solid footing.

Even so, Fed officials are uncertain whether the progress in reducing unemployment can be maintained given still-sluggish economic growth, and many economists believe the central bank will launch another round of bond buying later in the year.

In a poll on Friday of firms that trade directly with the Fed, 14 of 18 economists anticipated further quantitative easing. That survey was taken after the government said the economy created more than 200,000 jobs for the third month running in February.

Analysts are looking to the Fed's two-day meetings in April and June for decisions about any new direction for policy. At both meetings, Bernanke will hold a news conference and officials will make public updated economic and interest rate projections.

Most economists think the economy will expand at about a 2 percent annual rate in the first quarter. Fed Chairman Ben Bernanke said in January it would normally take a growth pace of between 2 percent and 2.5 percent just to hold the jobless rate steady.

While the economic recovery is nearly three years old, officials lament that the United States is still far from full employment. Although the jobless rate has fallen significantly over the last six months, it remains stubbornly high.

(Editing by Andrea Ricci, Tim Ahmann and Andrea Evans)

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