Fed says economy is healthier, takes no new steps

WASHINGTON (AP) — The Federal Reserve on Tuesday portrayed the U.S. economy as slightly healthier and held off on any new steps to boost the economy.

Hiring is picking up and consumers are spending more despite slower growth globally, the Fed said in its latest policy statement.

Fed officials cautioned that unemployment remains high and that Europe’s financial crisis is posing a threat to the world’s economy. They left open the possibility of taking new steps next year if the economy worsens.

The Fed made only slight changes to November’s statement. The policy committee approved it by an identical 9-1 vote. Charles L. Evans, president of the Federal Reserve Bank of Chicago, dissented for the second straight meeting, arguing again for more action by the Fed.

Many economists said Fed policymakers likely spent their final meeting of the year fine-tuning a strategy for communicating changes in interest rates more explicitly. The Fed has left rates near zero for the past three years. More guidance would help assure investors, companies and consumers that rates won’t rise before a specific time.

The Fed made no mention of a new communications strategy in its statement, but economists say it could be unveiled as soon as next month, after the Fed’s Jan 24-25 policy meeting.

In September, the Fed said it would rearrange its bond holdings to stress longer-term maturities in an effort to exert more downward pressure on long-term rates.

That move followed the Fed’s announcement in August that it planned to keep its benchmark rate at a record low until at least mid-2013, as long as the economy remains weak. It was the first time it had committed to keeping the rate there for a specific period. The Fed repeated that time frame in its December policy statement.

The economy, while improving, is still weak, and it remains vulnerable to the European debt crisis, which could push the Continent into a recession and slow U.S. growth. On Nov. 30, the Fed joined other central banks in making it easier for banks to borrow dollars. The goal is to help prevent Europe’s crisis from igniting a global panic.

Now, Fed officials are debating how much further to go to signal a likely timetable for any rate changes. Under one option, the Fed would start forecasting the levels it envisions for the funds rate over the subsequent two years. It could publish this forecast, as it now does its economic outlook, four times a year.

Doing so would help assure investors, companies and consumers that rates won’t rise before a specific time. This practice might help lower long-term yields further — in effect providing a kind of stimulus.

Some worry that such guidance risks inhibiting the Fed’s flexibility to revise interest rates if necessary. Others counter that the Fed wouldn’t hesitate to shift rates if warranted, and they say the benefits of clearer guidance outweigh any constraints it might impose.

The Fed also is discussing setting an explicit target for “core” inflation, which excludes the volatile categories of energy and food. It has remained historically low — currently around 1.5 percent by one measure.

Should the U.S. economy worsen, the Fed could take bolder steps, such as buying more mortgage securities. Doing so could help push down mortgage rates and help boost home purchases. The weak housing market has been slowing the broader economy.

The boldest move left would be a third round of large-scale purchases of Treasury securities, but critics say this would raise the risk of future inflation. Many economists doubt it would help much anyway, because Treasury yields are already near historic lows. Unless Europe’s crisis worsens and spreads, few expect another program of Treasury purchases.