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Federal Reserve, eyeing jobless rate, stays course with bond-buying program

By Neil Irwin and Jia Lynn Yang
Washington Post Staff Writers
Wednesday, January 26, 2011; 6:49 PM

The Federal Reserve stuck with a subdued assessment of the nation's economic outlook Wednesday as it continued its strategy of buying vast sums of bonds to try to boost the economy.

The latest data "confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions," the Federal Open Market Committee said in a statement at the end of its two-day policy meeting. The message suggests that the Fed still views high unemployment as the economy's most pressing problem and that members have not bought into the more bullish assessment that some private forecasters have adopted recently.

"Growth in household spending picked up late last year," the Fed statement said, "but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit."

The stock market was up slightly for the day, with the Standard & Poor's 500-stock index up 0.4 percent. The Dow Jones industrial average spent much of the day above the 12,000 level, the first time since 2008 it surpassed that milestone, before closing at 11,985.44.

"Investors always like to see milestone levels," said Fred Dickson, chief investment strategist for the Davidson Co. "It's like a climbing marker on a mountain. We've just now passed another elevation point on our way up to a summit."

Looking at tepid expectations for growth, the Fed said it will continue with its plans, announced in November, to buy $600 billion of Treasury bonds by the end of June. The purchases are an effort to push down long-term interest rates and encourage more spending, rising stock prices and economic growth.

The central bank also left its target rate for short-term interest rates near zero, where it has remained for more than two years, and maintained its view that conditions are likely to warrant "exceptionally low" rates for an extended period.

The overriding message out of the statement is that "growth has not been fast enough and underlying inflation remains too low," said J.P. Morgan Chase economist Michael Feroli. "The main take-away is fairly clear - the FOMC fully intends to complete its $600 billion asset purchase plan."

Indeed, the language of the statement was little changed overall from the Dec. 14 meeting. But for the first time in a year, the board's decision was unanimous, signaling some consensus and comity among Fed policymakers.

The presidents of the 12 regional Fed banks rotate voting slots on the committee. Kansas City Fed President Thomas Hoenig, who dissented from the Fed's action at every meeting in 2010, and other voters were replaced by colleagues from elsewhere in the country. While the roster of voting members in 2011 includes some vocal skeptics of the bond purchase program, namely Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser, neither expressed dissent. The Fed officials who have resisted the bond purchase have argued that it could spark inflation and cause financial imbalances.

And while Fed officials acknowledged that commodity prices have risen in recent months, there was no sign that they viewed higher prices for fuel, food and other raw materials as likely to trigger broader inflation. The statement said "measures of underlying inflation" - such as those excluding food and energy - "have been trending downward."

Several Fed leaders, including Chairman Ben S. Bernanke, have said they expect U.S. economic growth to accelerate a bit in 2011, perhaps to the range of 3 to 4 percent. The Fed officials submitted written forecasts for growth, unemployment and inflation in advance of this week's policy meeting, but those will not be released publicly until mid-February.

The Fed's bond purchases have contributed to the rally in the stock market in recent months, with the S&P 500 up 8 percent since the program's announcement Nov. 3. Bernanke explicitly mentioned the rise in stock prices as a sign that the strategy is working, but improved corporate profits are also a factor in rising stock prices.

For months, corporations from a wide swath of industries have been reporting record earnings, fueling the market rally.

"None of this just sort of snuck up on us," said Phil Orlando, chief equity market strategist for Federated Investors. "This is the second-most-powerful rally in the last century that's been developing over the last two years. The stock market is simply reflecting the fact that the world is not coming to an end and we're starting to heal and grow."

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