WASHINGTON (Reuters) - The Federal Reserve on Wednesday offered a guardedly upbeat view of the U.S. economy and renewed its pledge to keep interest rates near zero despite the objection of one policy maker.
The decision to hold rates steady by the Fed’s policy-setting Open Market Committee was 9-1, with Kansas City Federal Reserve Bank President Thomas Hoenig dissenting because he wanted the central bank to eliminate a phrase vowing to keep rates exceptionally low for “an extended period.”
The FOMC statement reflected a somewhat brighter tone than previously and appeared to put more faith in the sustainability of a nascent economic rebound.
“Economic activity has continued to strengthen,” the panel said after a two-day meeting, a slight upgrade from a December statement that said activity had “continued to pick up.”
It also described the pace of economic recovery as likely to be “moderate for a time,” having previously depicted the recovery as “likely to remain weak.”
“This is as close an admission that we are likely to see that the FOMC thinks the recession is over and the economy is on a self-sustaining recovery path,” said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi.
Tempering its optimism, the Fed removed a reference to an improving housing market after the latest batch of figures revealed a new round of weakness in the sector. Still, the Fed said it will allow its $1.43 trillion program of mortgage linked-debt purchases to expire as planned at the end of March.
The U.S. dollar extended gains after the Fed’s decision, pushing the euro below $1.40 for the first time since July as investors interpreted Hoenig’s dissent as bringing the central bank one step closer to tightening monetary policy. Stocks initially moved lower but then recovered to end higher, while Treasury bond prices dipped.
In what appeared to be a nod to its hawkish members, the Fed sounded less certain about the prospects for low inflation. Rather than saying price growth “will” remain subdued, it said simply that it “is likely” to do so.
In a Reuters poll of primary dealers, nine of 15 respondents said they expect the Fed to start raising rates this year and 13 dealers said they expect the Fed to stick to its plans to end purchases of mortgage-backed securities by March.
In an effort to stem the worst financial crisis in generations and combat a deep recession, the U.S. central bank not only slashed interest rates but undertook a series of emergency actions to soothe ailing credit markets.
Many of these actions, including bailouts of insurer American International Group Inc and other financial giants, have fueled taxpayer anger, endangering Fed Chairman Ben Bernanke’s nomination to a second term at the central bank.
Once expected to sail through, his confirmation vote ran into resistance last week, sending Wall Street, which strongly backs the chairman, sharply lower on Friday.
Financial markets, which took a drubbing last week, have stabilized as Bernanke’s confirmation began looking more certain. The latest Reuters tally showed 50 out of 100 senators were likely to vote for Bernanke, while 22 vowed to vote against him, citing public anger over bank bailouts and the financial crisis. The remaining senators were undecided.
The Senate will take up the nomination on Thursday.
The Fed reiterated that it was shuttering an array of emergency lending programs on February 1 and said its dollar swap arrangements with overseas central banks would also end on that date. It also announced a firm date to end a program for banks to obtain short-term loans.
The economy resumed growing in the third quarter and most economists think it expanded at a rapid clip in the final three months of 2009.
However, with the unemployment rate at 10 percent, consumer spending is likely to remain subdued. The housing market, which was at the root of the recession that began in December 2007, has also shown signs of weakness lately.
Figures earlier on Wednesday showed sales of new homes fell unexpectedly in December. That came on the heels of another report that showed a steep drop in sales of existing homes.