Federal Reserve officials Wednesday refrained from taking new steps to charge up the economy as they expressed some modest optimism about the recovery while they continue to debate ways to bring unemployment down without stoking inflation.
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The Federal Open Market Committee, the Fed’s decision-making body, voted 9-1 to leave their easy-credit policies unchanged for the first time since August, citing an economy that’s “strengthened somewhat in the third quarter.”
Pointing to continued division within the Fed, Chicago Fed President Charles Evans dissented because he wanted to see additional policy accommodation. It was the first dissent from an official wanting to take more action to ease credit since late 2007.
At the end of their two-day meeting, Fed officials said the strengthening recovery since the summer reflected “in part a reversal of the temporary factors that had weighed on growth earlier in the year.”
However, they said indicators continue to point to weakness in the jobs market. At the same time, the central bank signaled little concern over inflation, which it sees slowing after a commodity-driven price spike in the first half of the year. Long-term inflation expectations have “remained stable,” the central bank said.
Such a scenario would normally prompt the Fed to act. However, the central bank has already pushed interest rates to very low levels, and many Fed officials, including Chairman Ben Bernanke, believe it is Congress and the White House that should do more to aid the economy. Also, the economy seems to have picked up a little after hitting a wall last summer, giving the Fed time to assess the impact of steps taken in August and September to boost growth.
The FOMC reiterated that U.S. short-term interest rates are likely to remain close to zero at least through mid-2013, a move that was first announced August 9. The central bank will also continue to boost its share of long-term Treasurys, a step unveiled Sep. 21, in an effort to push down long-term interest rates. Both moves are aimed at boosting a persistently weak economy by getting consumers and companies to borrow and spend more.
“Household spending has increased at a somewhat faster pace in recent months,” Fed officials said.
The economy appears to have made some employment gains in recent weeks, but they’re too small to bring down the unemployment rate, which is still hovering above 9.0%. The nonfarm private sector added 110,000 jobs on a seasonally adjusted basis in October after adding 116,000 in September, data showed Wednesday. The report indicates moderate job growth ahead of the government’s official tally of U.S. employment which will be released Friday.
However, Fed officials cautioned that their economic outlook is subject to “significant downside risks.”
Despite some improvement over the past month, growth remains slow more than two years after the recession ended and is threatened by ongoing financial troubles in Europe. The rapid downfall this week of securities firm MF Global Holdings Ltd., which made bad bets on European debt, served as a reminder of how interconnected and fragile the global financial system is.
In the days leading up to the Fed meeting, some senior bank officials have been arguing in favor of further steps to spur growth. Vice Chairwoman Janet Yellen, New York Fed President William Dudley and Governor Daniel Tarullo all warned that the economy is at risk and that the Fed may need to purchase more securities-a step known to some as quantitative easing-to push down long-term rates.
However, others worry the Fed could do more harm than good with its actions. Pumping more money into the financial system may only bring more inflation without helping the jobs market, according to three officials who dissented at the central bank’s previous two meetings, but not this time: Dallas Fed President Richard Fisher, Philadelphia Fed President Charles Plosser and Minneapolis Fed President Narayana Kocherlakota.
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