Fed Takes No Action, Citing Signs of Moderate Growth

The Fed said that recent improvements in the economy came despite the deterioration of global conditions, and it noted the continuing risk that a European meltdown could undermine the nascent American recovery.

“The economy has been expanding moderately, notwithstanding some apparent slowing in global growth,” the Fed’s policy-making committee said in a statement announcing its decision. It noted an increase in household spending and some decline in unemployment as signs of progress.

The decision was supported by nine of 10 members of the Federal Open Market Committee. Charles Evans, president of the Federal Reserve Bank of Chicago, once again dissented from the decision, arguing that the Fed should take new measures to stimulate the economy. Mr. Evans has said that the central bank is not showing sufficient concern about the plight of millions of Americans who cannot find jobs.

The December meeting marked the third anniversary of the Fed’s decision to hold short-term interest rates near zero, a policy it has already said it plans to continue through at least the middle of 2013 and possibly longer.

The Fed also said it will continue its ongoing campaign to cut borrowing costs for businesses and consumers by investing in long-term Treasury securities, funded by proceeds from the sale of its existing holdings of short-term securities.

The news of greatest interest from Tuesday’s meeting may come when the committee releases an account of its deliberations, which it will do in early January.

Mr. Bernanke wants to improve public understanding of the Fed’s goals and methods, to increase the impact of its policies and to disarm its critics. The committee planned to discuss Tuesday a number of possible changes, including the publication of regular predictions of its own future policy decisions.

But any decisions will not be announced before the committee’s next meeting, in January. Mr. Bernanke will hold a press conference after that meeting, where he could explain the new policies. And the Fed already is scheduled to publish its regular forecast of other economic data, providing a convenient vehicle.

Fed officials say the changes could provide a modest economic boost, reducing borrowing costs for businesses and consumers, by convincing investors that the central bank will keep short-term interest rates near zero for longer than expected.

The changes also could help the Fed to justify any new efforts to stimulate growth. But such efforts, viewed as inevitable by many Fed watchers earlier this year, have come to seem less likely as the economy shows signs of improving health.

The Fed already is nervous about the cost of additional measures, such as a proposal to buy mortgage-backed securities to boost the housing market. Officials also doubt the benefits of such actions, arguing that Congress has much more power to boost the economy through changes in fiscal policy. Some 25 million Americans still cannot find full-time work, and the housing market remains deeply depressed, but evidence of economic improvement makes it easier for the Fed to stand still.

At the same time, Mr. Bernanke and his lieutenants have given no indication that they are ready to resume the discussions, suspended earlier this year, about when and how the central bank should begin to retreat from its existing efforts to stimulate growth. The two pillars of this campaign are the three-year-old vow to keep short-term interest rates near zero and the Fed’s portfolio of about $2.5 trillion in Treasuries and mortgage securities acquired to push down long-term rates.

The December meeting closes another roller-coaster year for the central bank, which once again spent the winter months trying to spur a recovery, the spring months declaring that the economy was on the mend – and the summer months wondering what went wrong and looking for new ways to try again.

The Fed said in August that it planned to hold interest rates near zero through at least the middle of 2013. Investors seek compensation based on their expectations about the future level of short-term interest rates. The Fed’s announcement was intended to reduce the cost of borrowing for businesses and consumers by declaring that any expectation of an earlier rate increase was likely misguided.

In September, the Fed announced a new round of asset purchases to further reduce long-term interest rates. Rather than increasing its investment portfolio, the central bank said that it would sell short-term securities and use the money to buy an equivalent volume of securities with longer terms.

The Fed’s most recent change in policy, taken at an unscheduled meeting of the committee last month, was focused on Europe rather than the United States. It agreed to lend dollars at little cost to foreign banks, easing the terms of an existing program. The initial response was enthusiastic. European banks borrowed more than $50 billion in the first week after the changes were announced.

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