Fed leaves rates unchanged, sees jobs improvement

WASHINGTON – April 29, 2010 – The Federal Reserve on Wednesday upgraded its economic outlook amid a better-than-expected recovery, but voted to keep interest rates at historically low levels and signaled that wouldn't change anytime soon.

Many Fed watchers had expected the central bank to indicate an interest rate increase was a few months away. Some fear persistently low rates will stoke inflation as the recovery revs up.

But in a statement at the close of its two-day meeting, the Fed said rates would remain "exceptionally low" for "an extended period." The central bank has kept its benchmark rate near zero since the beginning of the financial crisis in 2008.

"It's still a pretty dovish statement," says James O'Sullivan, chief economist of MF Global. That means the Fed is more worried about damping the recovery than sparking inflation.

For the third meeting in a row, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, cast the lone dissenting vote. He said it was no longer necessary to say rates would stay low "for an extended period" and doing so could limit policymakers' "flexibility to begin raising rates modestly."

The other Fed policymakers were more upbeat, saying the beleaguered labor market "is beginning to improve." In its previous statement, the central bank said employment was "stabilizing." The economy added 162,000 jobs last month, though the jobless rate held steady at 9.7 percent.

The Fed added, "Growth in household spending has picked up recently." Its previous statement said spending was "expanding at a moderate rate."

But the Fed continued to strike a note of caution. Consumer spending "remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit." Employers are still reluctant to hire, and lenders are tight-fisted. Inflation is "likely to be subdued for some time."

RDQ Economics said in a research note that it doesn't expect the Fed to raise interest rates before March 2011. Wells Fargo's John Silvia said the improved view of the job market suggests an increase is likely by September. It will probably happen "sooner than some people had thought," he says.

Burt White, chief investment officer for LPL, says the credit crises in Europe likely prevented the Fed from modifying its stance on rates. The overseas troubles, he says, could drive down exports, hurting economic growth. Fed officials likely worry combining that with fears of rising interest rates could squelch the budding recovery, White says.

Copyright © 2010 USA TODAY, a division of Gannett Co. Inc., Stephanie Armour.