The Federal Reserve extended its support for a slowing U.S. economy on Wednesday, sounding a bit less optimistic about growth and saying it will keep buying $85 billion in bonds per month for the time being.
In announcing the widely expected decision, Fed officials nodded to weaker economic prospects due in part to a fiscal fight in Washington that shuttered much of the government for 16 days earlier this month.
The Fed indicated the recovery in housing had lost some steam, while noting some reversal in a recent spike in borrowing costs.
"Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months," the Fed's policy-setting Federal Open Market Committee said. "Fiscal policy is restraining economic growth."
The labor market has shown "some" further improvement, the Fed said, tempering its description after a recent weakening in the jobs figures. It dropped a reference to a "tightening of financial conditions observed in recent months" from its list of risks to the outlook, but many economists stuck with bets for stimulus to stay into next year.
"Until the economic data strengthens, and strengthens meaningfully, I think expectations for tapering are going to remain subdued," said Rishna Memani, chief investment officer at Oppenheimer Funds in New York. "The likelihood of anything happening in December is modest."
Esther George, president of the Kansas City Federal Reserve Bank, dissented against the decision as she has at every FOMC meeting this year, favoring a modest reduction in the pace of bond purchases.
The Fed shocked financial markets in last month by opting not to scale back its bond buying, after allowing a perception to harden over the summer that it was ready to start easing off on stimulus. Its caution has since been vindicated.
Consumer and business confidence has been dented by the bitter political fight that triggered the government shutdown and pushed the nation to the brink of a potentially devastating debt default, and a slew of recent data has pointed to economic weakness.
Reports on Wednesday showed U.S. private-sector employers hired the fewest number of workers in six months in October, while inflation stayed under wraps last month.
Other recent data on hiring, factory output and home sales in September had already suggested the economy lost a step even before the government shut down. Readings on consumer confidence this month have shown the fiscal standoff rattled households.
The soft tone in the data has led markets to recalibrate forecasts for a tapering in the bond purchases and has pushed rate hike expectations back into mid-2015 at the earliest.
Before the FOMC statement's release, futures markets indicated a 52 percent chance of the first quarter-point rate hike by April 2015; that rose to 96 percent by September 2015. Yields on the 10-year U.S. Treasury note have fallen back to 2.50 percent, compared with almost 3 percent in early September.
The Fed left its guidance on when it may raise interest rates unchanged, saying current rates of near zero would be appropriate as long as the jobless rate remained above 6.5 percent and annual inflation remained under 2.5 percent.
In response to the deepest recession and weakest recovery in generations, the U.S. central bank cut interest rates to near zero and more than quadrupled its balance sheet to $3.8 trillion.
The response has not been uncontroversial, with some Fed hawks and many Republicans arguing there is a risk of runaway inflation or financial market bubbles.
However, core Fed officials, including Chairman Ben Bernanke and his presumptive successor, Vice Chair Janet Yellen, have argued that the threat of persistently high unemployment is the most pressing issue right now.
Data on Wednesday showed consumer price inflation at just 1.2 percent in the year through September, well below the central bank's 2 percent target.