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WASHINGTON (Reuters) - The Federal Reserve extended its support for a soft U.S. economy on Wednesday, sounding a bit less optimistic about growth as it announced plans to keep buying $85 billion in bonds per month.
In announcing the decision, the Fed nodded to weaker economic signals that have been due in part to a fiscal fight in Washington that shuttered much of the government for 16 days earlier this month.
The central bank noted that the recovery in the housing market had lost some steam and suggested some frustration at how slowly the labor market was healing.
However, it also dropped a phrase expressing concern about a run-up in borrowing costs, suggesting greater comfort with the current level of interest rates.
"Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months," the policy-setting Federal Open Market Committee said. "Fiscal policy is restraining economic growth."
The decision on bond buying was widely expected and the Fed's statement differed only slightly from the economic assessment it delivered after its last meeting in September.
U.S. stocks sold off slightly, while the dollar climbed against the euro and the yen. Prices of U.S. Treasuries turned negative, pushing yields higher.
"On balance, the Fed's statement was slightly less dovish than expected," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange. He cited the central bank's abandonment of a phrase that expressed concern about an earlier tightening in financial conditions, including higher mortgage rates, which other economists also saw as fractionally hawkish.
Still, the Fed tempered its description of the labor market to take into account a recent weakening in jobs figures, saying only that there had been "some" further improvement.
"Until the economic data strengthens, and strengthens meaningfully, I think expectations for tapering (the bond purchases) are going to remain subdued," said Krishna Memani, chief investment officer at Oppenheimer Funds in New York.
He said there were only "modest" chances the Fed would reduce its buying at its next meeting in December.
The Fed shocked financial markets last month by opting not to scale back its bond buying, after allowing a perception to harden over the summer that it was ready to start easing off on the stimulus. Its caution has since been vindicated.
Consumer and business confidence has been dented by the bitter political fight that triggered the government shutdown and pushed the nation to the brink of a harmful debt default, and a slew of recent data has pointed to economic weakness.
Reports on Wednesday showed U.S. private-sector employers hired the fewest number of workers in six months in October, while inflation stayed under wraps last month.
Other data on hiring, factory output and home sales in September had already suggested the economy lost a step even before the government shut down. Readings on consumer confidence this month have shown the fiscal standoff rattled households.
But policymakers made no direct reference to the budget showdown, which Paul Ashworth, chief U.S. economist at Capital Economics, saw as a telling omission.
"If officials are trying to downplay the impact of the shutdown and are happier with the level of long-term interest rates, then perhaps a December taper isn't quite as out of the question as we had previously thought," he said. "We still think sometime early next year is the most likely outcome, but the balance of risks just shifted a little."
In response to the deepest recession and weakest recovery in generations, the central bank lowered overnight interest rates to near zero in 2008 and more than quadrupled its balance sheet to $3.8 trillion through its bond purchases.
The Fed repeated on Wednesday that it would keep rates near zero as long as the jobless rate remained above 6.5 percent and inflation did not threaten to rise above 2.5 percent.
Traders of rate futures kept bets in place that the central bank will wait to raise rates until at least April 2015.
The response to the Fed's aggressive easing of monetary policy has not been uncontroversial, with some Fed hawks and many Republicans arguing there is a risk of runaway inflation or financial market bubbles.
One of those hawks, Kansas City Federal Reserve Bank President Esther George, dissented from the central bank's latest decision - as she has at every meeting this year - favoring a modest reduction in the pace of bond purchases.
In contrast, Fed Chairman Ben Bernanke and his presumptive successor, Vice Chair Janet Yellen, have argued that the threat of persistently high unemployment is the most pressing issue right now.
Data on Wednesday showed inflation over the past 12 months at just 1.2 percent, well below the central bank's 2 percent target.
Reporting by Pedro da Costa and Alister Bull; Editing by Krista Hughes, Tim Ahmann and Andrea Ricci