(Photo by Karen Bleier, AFP/Getty Images)

The Federal Reserve announced Wednesday it will scale back its support for the U.S. economy by another $10 billion, reaffirming its confidence in the recovery despite stalled growth over the winter.

In an official statement, the central bank said that economic activity “slowed sharply” earlier in the year but noted it has “picked up recently.” New government data released Wednesday morning showed the economy was essentially stagnant during the first quarter, inching up just 0.1 percent on a seasonally adjusted annual basis.

“The committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions,” the Fed’s policy-setting committee said in the statement following its two-day meeting in Washington.

The Fed has been steadily winding down its trillion-dollar stimulus program in recent months amid signs that the recovery is strengthening and the labor market is picking up. Officials voted unanimously Wednesday to reduce the central bank’s monthly purchases of Treasury bonds and mortgage-backed securities by $10 billion to $45 billion a month.

But the disappointing reading on economic growth earlier in the day underscored how bumpy the road back to normal can be. One of the main challenges facing the Fed is calibrating its response to sometimes conflicting or misleading data.

Officials have said that the phaseout of  bond purchases is not on autopilot: The Fed can speed it up or slow it down, depending on how the economy progresses. But Wednesday’s decision to continue the wind down shows the bar for changing course is high. Since announcing the phaseout in December, the central bank has reduced the amount of purchases by $10 billion at each meeting. Analysts and investors generally expect that steady pace to continue until the program ends altogether in the fourth quarter.

The stimulus program, known as quantitative easing, was intended to lower long-term interest rates and helped drive mortgage rates to historic lows. In its statement Wednesday, the Fed acknowledged that the “recovery in the housing sector remained slow.” It said the ongoing bond purchases – even at a reduced rate – should help keep interest rates low and ease lending.

Yet rates for a 30-year fixed home loan are up almost a percentage point from a year ago, when the Fed began hinting that it would begin pulling back the program. Recent data on the real estate market have been mixed, with new home sales plummeting in March but pending home sales rising for the first time in nine months.

The central bank offered no new clues about when it might raise its benchmark short-term interest rate, which has been at zero since 2008. It repeated language from its last meeting in March stating that it will consider the country’s realized and expected progress toward full employment and 2 percent inflation in determining when to increase rates. The Fed also reiterated that it will take into account “a wide range of information,” including the health of the labor market, inflation pressures and financial developments.

That guidance is deliberately vague enough to give the Fed plenty of wiggle room in deciding when to act -- a sign of the broad dispersion of views about the trajectory of the recovery. Some of the central bank’s top officials are worried that years of easy-money policies could be destabilizing the financial system and have called for a quick return to higher rates. Others believe the economy could soon take off and force the Fed to react quickly. But some believe the recovery remains fragile and fear the central bank is pulling back too fast.

In its statement, the Fed said that it may keep short-term rates below historical levels even after the economy is near full employment and inflation picks up. Officials have pointed to persistent headwinds from the Great Recession, such as the higher savings rate, as reasons to keep rates low.

The Fed’s board of governors also held a closed-door meeting this week to discuss medium-term monetary policy issues. Detailed information about the gathering was unavailable, but similar meetings were held in 2011. Among the topics discussed then was the creation of principles to guide the Fed’s exit from the unconventional policies pursued in the wake of the financial crisis.


U.S. economy stalls dramatically in first quarter

China rejects sign it may soon be No. 1 economy

Wonkblog: More reasons why the U.S. is the best place to be rich