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Federal Reserve leaves rates, policy unchanged

AP
  • A two-day meeting ended Wednesday
  • Fed poliycmakers slightly more upbeat on economic outlook
  • Economists proved on target: no dramatic action from Fed

The Federal Reserve on Wednesday provided a slightly more upbeat view of the economy but said it had decided not to scale back the aggressive steps it took last month to stimulate a still-sputtering recovery.

Federal Reserve Chair Ben Bernanke.

Fed policymakers announced no change in policy and no new action at 2:15 p.m. ET, after a two-day meeting in Washington, D.C.

To continue its efforts to help push down mortgage rates, the Fed reiterated it will buy $40 billion a month in government mortgage-backed securities until there are signs that the job market is improving significantly.

And Fed policymakers again said they plan to keep short-term interest rates near zero until at least mid-2015 — a timetable the Fed extended last month from late 2014.

In a statement after the meeting, the Fed said the economy has continued to expand at a "moderate pace in recent months," echoing the view it said it held last month. And despite September's surprising drop in the jobless rate to 7.8% from 8.1%, the Fed repeated that unemployment "remains elevated."

On the bright side, the Fed said "household spending has advanced a bit more quickly." Last month, it simply said spending "has continued to advance." Retail sales rose briskly last month across a broad range of categories.

However, the statement was a bit more downbeat about business spending, saying growth "has slowed." It previously said growth "appears to have slowed."

Economic reports generally have been more positive since the Fed launched a third round of government bond purchases on Sept. 13 to bolster the recovery. The Commerce Department said Wednesday that new homes sales in September rose 5.7% to the highest level since spring 2010, solidifying confidence in a burgeoning housing recovery. And manufacturing activity, retail sales and consumer confidence all strengthened in September.

But businesses have pulled back on spending and disappointing third-quarter corporate earnings have pummeled stocks the past week.

The Fed's mortgage bond buying program marks the first time Fed policymakers have made an open-ended commitment to buy government bonds, signaling an unprecedented level of support for the halting recovery.

Since the Fed's Sept. 13 move, rates on 30-year mortgages have fallen to 3.37% from 3.55%. Mortgage applications, particularly refinancings that give consumers more spending money, surged initially but have fallen in recent weeks.

The Fed action also was intended to spur investors to move money from bonds to higher-risk stocks, driving up stock prices and making consumers feel wealthier so they'll spend more. Back in Sept. 13, the Dow Jones Industrial Average jumped about 200 points, or 1.5%, immediately after the Fed action, but has fallen more than 400 points the past week on weak earnings and bleaker profit outlooks.

The mortgage bond-buying initiative supplements a Fed program to buy $45 billion in long-term Treasury bonds each month and sell a similar amount in short-term bonds until year's end. That program, known as Operation Twist, is also intended to lower long-term interest rates.

The Fed indicated it could launch additional asset purchases if the labor market doesn't pick up substantially. Deutsche Bank Chief Economist Peter Hooper says the Fed likely will decide to buy $25 billion to $45 billion a month in additional Treasuries when Operation Twist ends in December, in addition to continuing the mortgage bond purchases.

Economist Paul Ashworth of Capital Economics says the Fed might defer such a move to see if a divided Congress is able to soften the impact of a package of year-end tax hikes and spending cuts that could hobble the economy.

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