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.
The U.S. central bank decided unanimously to forge ahead with its $600 billion bond-buying plan despite a considerably more upbeat assessment of the economy and the job market
It made no 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.
"The economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually," the Fed said in a post-meeting statement.
It was a much rosier outlook than the Fed had offered after its last meeting in January, when it characterized the recovery as 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."
However, meeting as global stock markets plunged in the aftermath of the Japanese earthquake, policymakers noted U.S. unemployment remains high, underlying inflation low and the housing sector depressed.
The Fed reiterated a pledge to keep interest rates, currently near zero, at very low levels for an extended period. That puts it at odds with other prominent monetary authorities like the European Central Bank, which has signaled a rate hike could come next month.
U.S. stocks trimmed losses after the Fed decision, but still closed down more than 1 percent. The dollar held steady against a broad basket of major currencies, 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.
Since the Fed's January meeting, the economy has continued to show signs of promise, with the unemployment falling 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.
After chopping overnight interest rates to near zero in December 2008, the Fed turned to buying mortgage and Treasury debt to keep long-term borrowing costs low and support the economy. In all, it has pledged to buy $2.3 trillion in debt.
The purchases have proven controversial, with domestic critics arguing the Fed is courting inflation while officials in emerging markets have accused the central bank of trying to boost U.S. exports by devaluing the dollar.
Full text of the Fed statement
Information received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.