Fed keeps rate at record low, ends bond buying

WASHINGTON - The Federal Reserve plans to keep a key interest rate at a record low to support a U.S. job market that's improving but still isn't fully healthy and help lift inflation from unusually low levels. As expected, it's also ending a bond purchase program that was intended to keep long-term rates low.

The Fed on Wednesday reiterated its plan to maintain its benchmark short-term rate near zero "for a considerable time." Most economists predict that the Fed won't raise that rate before mid-2015. The Fed's benchmark rate affects the rates on many consumer and business loans.

In a statement ending a policy meeting, the Fed suggested that the job market, though still not back to normal, is strengthening. The statement drops a previous reference to "significant" in referring to an "underutilization" of available workers. Instead, the Fed said that the underutilization of labor resources is "gradually diminishing." The Fed also said that labor market conditions had improved further with "solid job gains and a lower unemployment rate."

The change indicates that the Fed believes the labor market, while not completely restored following the Great Recession, is at least in better shape. One of the Fed's major goals is to achieve maximum employment, which it currently defines as an unemployment rate between 5.2 percent and 5.5 percent. The unemployment rate in September fell to 5.9 percent.

The decision was approved with a 9-1 vote. The one dissent came from Narayana Kocherlakota, the president of the Fed's regional bank in Minneapolis. He objected, contending that the Fed should have changed its rate hike guidance to link it to inflation expectations rising to the Fed's 2 percent target. He also argued that in light of the recent slide in the market's expectations for future inflation, the Fed should also have continued its bond purchase program at the current level of $15 billion.

Kocherlakota is considered one of the Fed's leading "doves," Fed officials who are more concerned about unemployment than the risk that low interest rates could trigger inflation. At the last meeting in September two "hawks," Fed officials who are more concerned about inflation threats, Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher, had dissented.

The U.S. economy has been benefiting from solid consumer and business spending, manufacturing growth and a surge in hiring that's reduced the unemployment rate to a six-year low of 5.9 percent. Still, the housing industry is still struggling, and global weakness poses a potential threat to U.S. growth.

Fed Chair Janet Yellen has stressed that while the unemployment rate is close to a historically normal level, other gauges of the job market remain a concern. These include stagnant pay; many part-time workers who can't find full-time jobs; and a historically high number of people who have given up looking for a job and are no longer counted as unemployed.

What's more, inflation remains so low it isn't even reaching the Fed's long-term target rate of 2 percent. When inflation is excessively low, people sometimes delay purchases - a trend that slows consumer spending, the economy's main fuel. The low short-term rates the Fed has engineered are intended, in part, to lift inflation.

Investors are expected to remain on high alert for the first hint that rates are set to move higher. Most economists have said they think the Fed will start raising rates by mid-2015. But global economic weakness, market turmoil and falling inflation forecasts have led some to suggest that the Fed might now wait longer.

The Fed's decision to end its third round of bond buying had been expected. It has gradually pared the purchases from $85 billion in Treasury and mortgage bonds each month to $15 billion. And the Fed had said it would likely end the program after its October meeting if the economy continued to improve.

Even with the end of new purchases, the Fed's investment holdings stand at $4.5 trillion - more than $3 trillion higher than when the bond purchases were launched in 2008 at the height of the financial crisis. The Fed has said it won't begin selling its holdings until after it starts raising short-term rates.

Most economists have predicted that the Fed's first rate hike won't occur until next summer. Some foresee no increase until fall, in part because of fears that the global economy is weakening and could threaten the U.S. economy.

The bond buying program the Fed is now ending was intended to lower long-term borrowing rates to encourage spending and spur economic growth. The Fed began the purchases after it had cut its main policy tool, the federal funds rate, as low as it could go. The Fed's benchmark short-term rate has been at zero since December 2008.

Supporters have said the bond buying helped invigorate the economy and reduce the unemployment rate, which peaked at 10 percent during 2009, to the current 5.9 percent.

Critics contend that the Fed will find it hard to sell its massive holdings without jolting financial markets. They also worry that all the money it has pumped into the economy will eventually ignite inflation and cause dangerous bubbles in assets like stocks or housing.