The Federal Reserve on Tuesday portrayed the
US economy as slightly healthier and held off on any new steps to boost growth.
Hiring is picking up and consumers are spending more despite slower growth globally, the Fed said in
its policy statement issued after its final meeting of the year.
However, Fed officials cautioned that
business investment has slowed and unemployment remains high. And they warned of strains in global financial markets that pose a threat to the world's economy - a reference to Europe's debt crisis. They left open the possibility of taking new steps next year if the economy worsens.
The Dow Jones industrial average closed down 66 points for the day, after being up by as much as 126 points before the Fed issued its statement. Broader indexes also ended the day lower.
FULL COVERAGE: Global economic crisis The Fed made only slight changes to November's statement. The policy committee approved it by an identical 9-1 vote. Charles Evans dissented for the second straight meeting, arguing again for more action by the Fed.
Still, the modestly upbeat statement appeared to disappoint investors and triggered the late-afternoon slump on Wall Street. Traders had hoped the Fed would announce new policy action, even though most economists expected none.
India not immune to global recession: Pranab "The Fed did exactly what the markets were expecting, which is nothing, so the market decline is puzzling," said Mark Zandi, chief economist at Moody's Analytics. "It is always possible that there was some outside hope the Fed would do more to support the economy at this meeting and when the markets didn't get that, they fell."
Many economists said Fed policymakers likely spent their final meeting of the year fine-tuning a strategy for communicating changes in interest rates more explicitly. The Fed has left rates near zero for the past three years. More guidance would help assure investors, companies and consumers that rates won't rise before a specific time.
The Fed made no mention of a new communications strategy in its statement. But economists say it could be unveiled as soon as next month, after the Fed's January 24-25 policy meeting.
In September, the Fed said it would re-arrange its bond holdings to stress longer-term maturities, to try to exert more downward pressure on long-term rates.
That followed the Fed's announcement in August that it planned to keep its benchmark rate at a record low until at least mid-2013, as long as the economy remains weak. It was the first time it had committed to keeping the rate there for a specific period. The Fed repeated that timeframe in its December policy statement.
Fed officials are debating how much further to go to signal a likely timetable for any rate changes. Under one option, the Fed would start forecasting the levels it envisions for the funds rate over the subsequent two years. It could publish this forecast, as it now does its economic outlook, four times a year.
Doing so would help assure investors, companies and consumers that rates won't rise before a specific time. This might help lower long-term yields further - in effect providing a kind of stimulus.
Some worry that such guidance risks inhibiting the Fed's flexibility to revise interest rates if necessary. Others counter that the Fed wouldn't hesitate to shift rates if warranted. And they say the benefits of clearer guidance outweigh any constraints it might impose.
The Fed is also discussing setting an explicit target for "core" inflation. Core inflation excludes the volatile categories of energy and food. It's remained historically low - currently around 1.5 per cent by one measure.
The economy, while improving, is still weak. And it remains vulnerable to the European debt crisis, which could push the continent into a recession and slow US growth. On November 30, the Fed joined other central banks in making it easier for banks to borrow dollars. The goal is to help prevent Europe's crisis from igniting a global panic.
Should the US economy worsen, the Fed could take bolder steps, such as buying more mortgage securities. Doing so could help push down mortgage rates and help boost home purchases. The weak housing market has been slowing the broader economy.
The boldest move left would be a third round of large-scale purchases of Treasury securities. But critics say this would raise the risk of future inflation. And many doubt it would help much anyway, because Treasury yields are already near historic lows. Unless Europe's crisis worsens and spreads, few expect another program of Treasury purchases.
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