* Fed's assessment of economy largely unchanged
* Raises prospect of changes in pace of bond buys
* Fiscal policy seen restraining economic growth
By Pedro da Costa and Alister Bull
WASHINGTON, May 1 The U.S. Federal Reserve said
on Wednesday it will continue buying $85 billion in bonds each
month to keep interest rates low and spur growth, and added it
would step up purchases if needed to protect the economy.
Expressing concern about a drag from Washington's
belt-tightening, the Fed described the economy as expanding
moderately in a statement that largely mirrored its last policy
announcement in March. Fed officials cited continued improvement
in labor market conditions and did not change their description
of inflation, saying it should remain at or below the central
bank's 2 percent target.
But policymakers reiterated that unemployment is still too
high and restated their intention to keep buying assets until
the outlook for jobs improves substantially.
"Fiscal policy is restraining economic growth," the U.S.
central bank's Federal Open Market Committee said in its policy
statement at the close of its two-day meeting. "The Committee is
prepared to increase or reduce the pace of its purchases to
maintain appropriate policy accommodation."
Some economists were surprised that the statement did not
contain a clearer acknowledgement of a recent weakening in the
Until recently, analysts had expected the Fed to buy a total
of $1 trillion in Treasury and mortgage-backed securities during
its ongoing third round of quantitative easing, known as QE3,
with expectations the Fed would start to take its foot off the
accelerator in the second half of this year.
Now, things are looking a bit more shaky.
"The talk of tapering has not only been pushed to the back
burner but pushed off the stove altogether. It's not something
we're likely to see until 2014," said Michael Woolfolk, senior
currency strategist at BNY Mellon in New York.
Wall Street stocks finished close to 1 percent lower after
initially paring losses following the Fed statement, and the
U.S. dollar weakened in choppy trade.
The president of the Kansas City Fed, Esther George,
dissented for a third straight meeting on Wednesday against the
Fed's support for growth, citing concerns about financial
imbalances and long-term inflation expectations.
Economic growth rebounded in the first quarter after a
dismal end to 2012, but the 2.5 percent annual rate of expansion
fell short of economists' estimates, and forecasters are already
penciling in a weaker second quarter.
The housing market continues to show signs of strength.
However, the industrial sector is not quite as perky, with a
report on Wednesday showing national factory activity barely
grew in April.
And the job market, the focus of much of the Fed's efforts,
remains sickly. U.S. employers added only 88,000 workers to
their payrolls in March, while private-sector data on Wednesday
suggested continued weakness in hiring.
At the same time, inflation has steadily been coming down.
The Fed's preferred measure of core inflation, which excludes
more volatile food and energy costs, rose just 1.1 percent in
the year to March. Overall inflation was up just 1 percent, the
smallest gain in 3-1/2 years.
The Fed targets inflation of 2 percent.
CHECKING THE TOOLKIT
In response to a deep financial crisis and recession, the
Fed cut overnight interest rates to effectively zero in late
2008. It has also bought over $2.5 trillion in assets, more than
tripling its balance sheet, to keep long-term rates low.
If the economy's fortunes do not improve, the central bank
may well look for fresh ways to boost its support to the
economy, and increasing the amount of assets it is buying is
just one option.
The Fed could announce an intent to hold the bonds it has
bought until maturity instead of selling them when the time
comes to tighten monetary policy. Fed Chairman Ben Bernanke has
already raised this as a possibility.
Policymakers could also set a lower unemployment threshold
to signal when the time might be ripe to finally raise rates.
Currently, the threshold stands at 6.5 percent, provided
inflation does not threaten to breach 2.5 percent.
Research suggests such "forward guidance" about the future
path of interest rates can have a strong impact on current
borrowing costs, and one Fed official -- Narayana Kocherlakota,
president of the Minneapolis Federal Reserve Bank -- has already
suggested lowering the threshold to give the economy a boost.