Economy healthier, sort of, Fed declares

Not enough improvement to shift policy

Federal Reserve policymakers Tuesday raised their assessment of the economy as the labor market gathers strength and refrained from new actions to lower borrowing costs.

“Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated,” the Federal Open Market Committee said in a statement at the conclusion of a meeting in Washington. It said “strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook.”

The best six-month streak of job growth since 2006 may not be enough to convince Chairman Ben Bernanke and fellow policymakers they can meet their goal of maximum employment without additional easing measures. Bernanke last month told U.S. lawmakers that the job market remains “far from normal” even as it showed signs of improvement.

The Fed left unchanged its statement that economic conditions would probably warrant “exceptionally low” interest rates at least through late 2014. The central bank in December 2008 lowered its target overnight interest

rate to a range of zero to 0.25 percent.

Policymakers said they will continue to swap $400 billion in short-term securities with long-term debt to lengthen the average maturity of the central bank’s holdings, a move dubbed Operation Twist. The Fed also did not alter its policy of reinvesting its portfolio of maturing housing debt into agency mortgage-backed securities.

“The FOMC is clearly shifting its stance away from blanket gloom to something more realistic, but they have a long way to go,” Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, N.Y., said in a note to clients.

Changes in the federal funds rate are the Fed’s primary lever for influencing the economy. The benchmark rate directly influences other shortterm rates, such as the prime rate and credit-card rates.

However, the Fed’s bigger influence on the economy flows from its monetary policy’s effects on long-term borrowing costs, such as rates on mortgages and corporate debt. Those interest rates affect the prices of stocks, bonds, real estate and other assets.

Inflation “has been subdued in recent months although prices of crude oil and gasoline have increased lately,” the Fed said Tuesday. The increase in oil will “push up inflation temporarily, but the committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.”

Rising oil has pushed the national average cost of gasoline up to $3.81 a gallon, from

Changes in the federal funds rate are the Fed’s primary lever for influencing the economy.

$3.28 at the start of the year, according to AAA.

The Fed said it expects “moderate economic growth” and said the unemployment rate “will decline gradually.” In its last statement in January, it said growth would be “modest” and unemployment “will decline only gradually.”

Richmond Fed President Jeffrey Lacker dissented for the second meeting in a row, saying he doesn’t anticipate that economic conditions are likely to warrant exceptionally low levels of the Fed funds rate through late 2014.

Policymakers will update their economic forecasts at the April 24-25 Fed meeting, which will be followed by a news conference with Bernanke.

Central bankers have already taken unprecedented steps to boost the economy after the longest and deepest recession since the Great Depression.

At its January meeting, the Fed said economic conditions would likely warrant keeping rates “exceptionally low” at least through late 2014, extending a previous date of mid-2013.

The central bank purchased $2.3 trillion of assets in two rounds of large-scale asset purchases, known as quantitative easing. In September, the Fed announced the $400 billion Operation Twist program to lengthen the average maturity of assets on its balance sheet.