Fed stands pat but says will act if needed

WASHINGTON Wed Apr 25, 2012 4:45pm EDT

U.S. Federal Reserve Chairman Ben Bernanke attends the International Monetary and Financial Committee (IMFC) meeting during the spring IMF-World Bank meetings in Washington April 21, 2012. REUTERS/Yuri Gripas

U.S. Federal Reserve Chairman Ben Bernanke attends the International Monetary and Financial Committee (IMFC) meeting during the spring IMF-World Bank meetings in Washington April 21, 2012.

Credit: Reuters/Yuri Gripas

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke on Wednesday said U.S. monetary policy is "more or less in the right place" even though the central bank would not hesitate to launch another round of bond purchases if the economy were to weaken.

In a statement after a two-day meeting, the Fed's policy-setting panel reiterated its expectation that interest rates would not rise until late 2014 at the earliest, and it took no action on monetary policy.

The Fed also adjusted its economic forecasts to acknowledge both a labor market that is improving and stronger than expected growth this year. At the same time, officials anticipate that tax hikes and spending cuts could slow growth in 2013 and 2014.

"We remain entirely prepared to take additional balance sheet actions as necessary to achieve our objectives," Bernanke told reporters. "Those tools remained very much on the table and we would not hesitate to use them should the economy require that additional support."

He said the central bank could be spurred into action if the U.S. unemployment rate, which stood at 8.2 percent last month, failed to keep moving lower, but added: "For the time being, it appears that we are more or less in the right place."

In response to the deepest recession in generations, the Fed cut overnight rates to near zero in December 2008 and more than tripled its balance sheet by purchasing $2.3 trillion in government and mortgage bonds in two rounds of so-called quantitative easing.

Fresh projections released by the central bank showed the most dovish officials no longer want to put off a rate increase until 2016, a move analysts said could also suggest there is less of an appetite within the Fed for further easing.

The projections showed seven officials now believe it would be appropriate to raise borrowing costs some time in 2014, up from five in January, while only four wanted to wait longer, down from six. Interest-rate futures showed traders betting the first rate hike would come in March 2014, a month sooner than earlier thought.

"It looks like the more positive data over the past few months has affected the people at the more dovish end of the spectrum," said Sean Incremona, an economist at 4Cast in New York. Colin Lundgren, head of fixed income at Columbia Management in Minneapolis, said: "I wouldn't call it hawkish. It's more that they are less dovish."

Prices for long-term U.S. government debt ended slightly lower as investors pulled back bets on further bond buying. Stocks closed higher as a near doubling of profits at Apple fueled optimism.

Richmond Fed President Jeffrey Lacker dissented against the central bank's policy decision, saying he believed rates would need to rise sooner than late 2014. He has now dissented at all three of the policy meetings the Fed has held this year.

INFLATION SPIKE SEEN TEMPORARY

U.S. economic growth has been just firm enough to weaken the case for additional stimulus through Fed bond purchases. Gross domestic product expanded at a 3 percent annual rate in the fourth quarter but economists expect it slowed to around a 2.5 percent pace in the first three months of this year.

The Fed described the economy as expanding moderately, just as it did last month, and said the unemployment rate had declined but remains elevated. In March, it had said the jobless rate had declined "notably."

The central bank bumped up its growth forecast for 2012 but lowered it for the next two years. The fresh four-times-a-year projections showed the central bank expects the jobless rate to fall faster than it did previously.

Further, it sees higher inflation over the next few years than it saw in January, with a notable rise in its forecasts for this year that takes into account a run-up in gasoline prices.

Still, the Fed does not expect inflation to breach its 2 percent target.

Policymakers nodded to "some signs of improvement" in the housing sector and, while repeating that they expect moderate economic growth in coming quarters, said the recovery should then "pick up gradually."

"To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the committee expects to maintain a highly accommodative stance for monetary policy," the Fed said.

As officials gathered, the government reported that orders for long-lasting manufactured goods plunged 4.2 percent in March, the biggest drop since the economy was nose-diving in early 2009. The data was the latest to suggest the economy lost momentum as the first quarter drew to a close.

(Writing by Jonathan Spicer; Editing by Andrea Ricci and Tim Ahmann)

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