The board room at the Federal Reserve. File. / Tim Dillon, USA TODAY
The Federal Reserve on Wednesday said its policymaking comittee has agreed to continue buying $85 billion a month in government bonds to hold down interest rates and stimulate economic growth.
Its statement after a two-day meeting provided no signal that it would rein in the program anytime soon.
Earlier Wednesday, reports provided mixed signals about the health of the economy. The Commerce Department said economic growth fell 0.1% in the fourth quarter - first decline since 2009 - though it was largely due to sharp but temporary reductions in defense spending and business inventory building. Consumer and business spending rose solidly. The GDP figure could be revised twice in coming months.
Also, payroll processor ADP estimated Wednesday that the private sector added a better-than-expected 192,000 jobs in January, raising hopes that the government's employment report Friday could exceed economists' projected gains for government and industry of about 153,000.
Fed policymakers in December voted to continue monthly purchases of $45 billion in long-term Treasury bonds as part of its effort to boost economic growth. The Fed had been selling a similar amount of short-term bonds, keeping its holdings stable, but that program, known as Operation Twist, ended in December.
By pumping more money into the banking system, the new purchases represent a more aggressive strategy by the Fed to boost employment now at the risk of higher inflation in the future. Inflation is low now, and Fed Chairman Ben Bernanke has said the Fed has the means to shift its emphasis to attacking inflation should that become necessary.
The Fed last month also said it would continue buying $40 billion a month in mortgage-backed securities. Both the Treasury and mortgage bond purchases are aimed at lowering long-term interest rates to spark purchases of homes, cars and factory equipment.
With unemployment still high at 7.8%, the Fed on Wednesday renewed its commitment to continue buying bonds until the job market improves "substantially."
Yet minutes of the December meeting showed several Fed members worry that the Fed could have trouble eventually selling the nearly $2.5 trillion in government bonds it has bought since the 2008 financial crisis. They favor ending the bond-buying by mid-year, a view that has pushed up yields on some Treasury bonds. Other Fed policymakers want to continue the purchases at least until year end.
The Fed on Wednesday did not suggest the bond-buying would continue only in the near-term - a move that Goldman Sachs says would have signaled a possible early end to the program.
Kansas City Fed President Esther George, a new voting member of the policy committee, was the lone dissenter to Wednesday's policy action. She said the Fed's easy-money policies "increased the risks of future economic and financial imbalances" and could raise inflation expectations.
In addition to buying bonds, the central bank renewed its commitment to keep its benchmark short-term interest rate near zero at least until the unemployment rate falls to 6.5%, as long as the one- to two-year inflation forecast remains below 2.5%.
The unprecedented decision to link interest rates to a specific economic target was consistent with the Fed's previous expectation of keeping the rate low until mid-2015. But the switch from a time horizon to an unemployment rate target allows financial markets to adjust interest rates instantly based on changing economic conditions.
In its statement, the Fed said economic activity "paused in recent months" as a result of Superstorm Sandy "and other transitory factors." In December, the Fed said the economy was growing moderately.
Yet the central bank upgraded its outlook for several key economic barometers despite the recent budget standoff in Washington. It said both household and business spending "advanced" in recent weeks. Last month, it said business investment had slowed.
And the Fed took note of recent easing of the European financial crisis. "Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook."
In December, by contrast, the Fed said only that "strains in global financial markets continue to pose significant downside risks to the economic outlook."
BERNANKE'S FUTURE: If he leaves, Yellen could take the job
The voting members on the Federal Reserve's policy making Federal Open Market Committee changed with the new year.
Fed Chairman Ben Bernanke and the six other governors of the Federal Reserve keep their votes, as does William Dudley, president of the Federal Reserve Bank of New York. All have permanent seats. But presidents of four regional Federal Reserve banks lose their votes as four other regional bank presidents rotate in.
Among those leaving is Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, who was the lone dissenter at each of last year's eight meetings. Lacker said he thought the job market was being slowed by factors beyond the Fed's control and continued bond purchases would risk worsening future inflation.
In addition to Esther George of the Fed's Kansas City bank, the other regional bank presidents gaining votes this year are Charles Evans of Chicago, Eric Rosengren of Boston and James Bullard of St. Louis.
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