* Fed statement seen as dovish, silent on bond tapering
* Fed says low inflation a risk, but should move higher
* Housing strengthening, but mortgage rates have risen
By Pedro da Costa and Alister Bull
WASHINGTON, July 31 The Federal Reserve on
Wednesday said the U.S. economy continues to recover but is
still in need of support, offering no indication that it is
planning to reduce its bond-buying stimulus at its next meeting
Wrapping up a two-day gathering, the central bank said it
would keep buying $85 billion in mortgage and Treasury
securities per month in an effort to strengthen an economy that
it said was still challenged by federal budget-tightening.
The Fed made three notable adjustments to its post-meeting
statement, which economists said gave it a dovish tilt.
First, it slightly downgraded its view of the recovery,
calling the pace of growth "modest" rather than "moderate," as
it had consistently for most of the past year.
It also noted that mortgage rates had risen, implicitly
flagging this as a potential headwind to the housing recovery.
And, importantly, it nodded to the potential dangers of
inflation running too low - an addition that apparently secured
the vote of St. Louis Federal Reserve Bank President James
Bullard, who dissented in June over worries about ebbing price
"The committee recognizes that inflation persistently below
its 2 percent objective could pose risks to economic
performance, but it anticipates that inflation will move back
toward its objective over the medium term," the Fed said.
Economists expect the Fed to reduce its bond-buying pace in
September, but the changes create wiggle room for the Fed if
data before then does not point to a strengthening economy.
The Fed's statement gave stock prices a brief lift, but they
closed lower on the day, while prices for U.S. government bonds
edged higher and the dollar fell.
"The statement was mildly dovish, since the (Fed) did not
provide a more detailed timetable for tapering asset purchases
and offered no additional or new guidance on the taper," said
Scott Anderson, chief economist of Bank of the West in San
EYE ON PRICES
Esther George of the Kansas City Fed voted against the
bond-buying decision due to concerns about potential harm to
financial stability from the central bank's prolonged easy
monetary policy, as she has at every meeting this year.
The Fed cut interest rates to almost zero in late 2008 and
has since more than tripled the size of its balance sheet to
around $3.6 trillion via three massive rounds of bond buying
aimed at holding down longer-term borrowing costs.
At a news conference on June 19, Fed Chairman Ben Bernanke
said the central bank likely would start to curtail its current
round of purchases later this year, with an eye toward bringing
them to a close by the middle of 2014.
A government report on Wednesday showed the U.S. economy
expanded at a faster-than-expected 1.7 percent annual rate in
the second quarter, but the growth figure for the first quarter
was revised down to 1.1 percent from 1.8 percent.
Further, the report showed consumer prices held steady in
the quarter, with so-called core prices advancing at a 0.8
percent pace, well below the Fed's 2 percent target.
Even as it tiptoes toward a curtailing of its bond
purchases, the Fed has gone out of its way to stress that any
pull-back would not mean it was anywhere near jacking up
In another slightly dovish adjustment to its statement, the
Fed "reaffirmed" on Wednesday its view that ultra-easy monetary
policy would be needed for a considerable period after bond
However, the Fed made no change to the key thresholds of its
forward guidance on rate lift-off, repeating it will hold rates
near zero for as long as the unemployment rate remains above 6.5
percent, provided the outlook for inflation between one and two
years ahead is not projected to rise above 2.5 percent.
The jobless rate stood at 7.6 percent in June, and
economists expect a report on Friday to show it ticked down to
7.5 percent in July.
Despite the Fed's best efforts to use its forward guidance
to hold down longer-term borrowing costs, markets have responded
to talk of a likely reduction in the central bank's asset
purchases by selling bonds.
The yield on the benchmark 10-year U.S. Treasury note stands
about a full percentage point above where it was in early May.
Mortgage rates have risen a similar amount.
"Household spending and business fixed investment advanced,
and the housing sector has been strengthening, but mortgage
rates have risen somewhat and fiscal policy is restraining
economic growth," the Fed said.