Federal Reserve still sees trouble in economy

Federal Reserve policymakers on Wednesday predicted a gradual resumption of sustainable economic growth, but warned the underlying economy remains weak.

The central bank said it would keep interest rates near zero for the foreseeable future, but also said it saw a “leveling out” of economic activity and noted that conditions in financial markets have improved in recent weeks.

{mosads}These conclusions were offered in a statement released at the conclusion of a two-day meeting by the Federal Reserve Board of Governors. The statement said the central bank will employ all available tools to promote an economic recovery and to preserve price stability.

While household spending has shown signs of stabilizing, the policymakers said, U.S. consumers remain constrained by job losses, sluggish income growth, lower housing wealth and tight credit.

Businesses are still cutting back on staffing and fixed investment, but are making progress in bringing inventory stocks into better alignment with sales.

“Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability,” the statement said.

Stocks rose Wednesday on anticipation of the Fed announcement. The Dow Jones Industrial Average was up more than 100 points just after 2:30 p.m. EST.

As expected, the Fed said it would keep a key interest rate at a range of between zero percent and 0.25 percent, and it indicated this “exceptionally” low rate will probably remain for an extended period of time because of economic conditions.

The Fed said that it expected inflation to remain subdued for sometime despite a jump in the commodity prices.

The Fed also said it would go forward with a previously announced plan to purchase $1.25 trillion of mortgage-backed securities and up to $200 billion of debt by the end of the year.

But the Fed said it would slow the purchase of $300 billion in Treasury securities that are intended to help credit markets. The Fed was expected to conclude these purchases by the middle of next month, but the statement said it would be slowed and the full $300 billion would not be purchased until the end of October.

“The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets,” the statement said.