Steady Fed sees firmer economy, watchful on oil

Reuters News
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Posted: Mar 22, 2011 12:07 PM
Steady Fed sees firmer economy, watchful on oil

By Pedro da Costa and Mark Felsenthal

WASHINGTON (Reuters) - The Federal Reserve said on Tuesday the U.S. recovery is gaining traction and inflation pressure from soaring energy costs should be short-lived, allowing it to maintain its heavy support for the economy.

Despite a marked upgrade of the U.S. central bank's view of the economy and the job market, the Fed decided unanimously to forge ahead with its $600 billion bond-buying plan.

Policymakers, meeting as global stock markets plunged in the aftermath of the Japanese earthquake, noted U.S. unemployment remains high, underlying inflation low and the housing sector depressed. They reiterated a pledge to keep interest rates, currently near zero, at very low levels for an extended period.

"The economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually," it said in a statement after a one-day meeting.

It was a much rosier assessment than what the Fed offered at its last meeting in January, when it said the recovery was still too weak to significantly bring down unemployment.

The statement also dropped a reference to economic progress being "disappointingly slow" and a list of roadblocks to consumer spending. In addition, it removed a passage stating that employers remained reluctant to hire.

"The Federal Reserve is setting the stage for an end to its aggressive monetary support for the U.S. economy," said Augustine Faucher, director of macroeconomics at Moody's Analytics. "The economic data have been stronger, markets are generally positive, and job growth is picking up."

U.S. stocks trimmed losses and the dollar held steady against the euro and the yen after the statement was released, while U.S. government debt prices pared earlier gains.

The Fed dedicated an unusually large portion of its statement to inflation concerns surrounding a recent spike in energy and food prices. It said it would monitor inflation and expectations for future prices closely, but added that the situation appears to be under control.

"Long-term inflation expectations have remained stable, and measures of underlying inflation have been subdued," it said.

The statement made no direct mention of Japan, which is grappling with the aftermath of the country's worst earthquake on record -- and struggling desperately to avert a nuclear disaster.

PROMISE AND PAIN

Since the Fed's last meeting in January, the U.S. economy has continued to show signs of promise. The U.S. unemployment rate has fallen rapidly, down to 8.9 percent in February from 9.8 percent in November.

Still, the pace of hiring suggests further progress will be painfully slow for the 8-million-plus Americans who lost their jobs during the economic slump of 2007-2009.

At the same time, higher gasoline costs have created fresh concerns for consumers, with a big hit to confidence this month raising concerns whether a recent spurt in consumer spending can be sustained.

The U.S. economy expanded at an annual rate of 2.8 percent in the fourth quarter, a respectable performance but a faster pace will likely be needed to make a further appreciable dent in unemployment.

Some economists thought growth could approach 4 percent this quarter, but have pared back projections, in part because of an unexpected widening in the U.S. trade deficit.

The Fed effectively chopped overnight interest rates down to zero in December 2008 and then turned to buying mortgage and Treasury debt to keep long-term borrowing costs low in a bid to support the economy. In all, it has committed to buying $2.3 trillion in debt.

The asset purchases have proven controversial, with domestic critics arguing the Fed is courting future inflation while officials in emerging markets have accused the central bank of trying to boost U.S. exports by devaluing the dollar.

With the economy strengthening, officials are also likely to have had a vigorous debate on how best to eventually tighten policy, but analysts will have to wait until Fed speakers take to the podium again to get a fuller flavor of the discussions.