Fed takes no new action in latest meeting

WASHINGTON — The Federal Reserve said Tuesday that the economy has improved modestly as hiring and consumer spending have picked up. As a result, it’s holding off on any new steps to boost the economy.

Fed officials cautioned in their statement that unemployment remains high. And it noted that global economic growth has slowed — a reference to Europe’s debt crisis. They left open the possibility of taking new steps next year if the economy worsens.

The statement had only slight changes from November’s statement. It was approved by an identical 9-1 vote. Charles Evans dissented for the second straight meeting, arguing again for more action by the Fed.

Many economists said Fed policymakers likely spent their final meeting of the year fine-tuning a strategy for communicating changes in interest rates more explicitly. The Fed has left rates near zero for the past three years. More guidance would help assure investors, companies and consumers that rates won’t rise before a specific time.

The Fed made no mention of a new communications strategy in its statement. But economists say it could be unveiled as soon as next month, after the Fed’s Jan 24-25 policy meeting.

In September, the Fed said it would re-arrange its bond holdings to stress longer-term maturities, to try to exert more downward pressure on long-term rates.

That followed the Fed’s announcement in August that it planned to keep its benchmark rate at a record low until at least mid-2013, as long as the economy remains weak. It was the first time it had committed to keeping the rate there for a specific period. The Fed repeated that timeframe in its December policy statement.

The economy, while improving, is still weak. And it remains vulnerable to the European debt crisis, which could push the continent into a recession and slow U.S. growth. On Nov. 30, the Fed joined other central banks in making it easier for banks to borrow dollars. The goal is to help prevent Europe’s crisis from igniting a global panic.

Now, Fed officials are debating how much further to go to signal a likely timetable for any rate changes. Under one option, the Fed would start forecasting the levels it envisions for the funds rate over the subsequent two years. It could publish this forecast, as it now does its economic outlook, four times a year.

Doing so would help assure investors, companies and consumers that rates won’t rise before a specific time. This might help lower long-term yields further — in effect providing a kind of stimulus.

Some worry that such guidance risks inhibiting the Fed’s flexibility to revise interest rates if necessary. Others counter that the Fed wouldn’t hesitate to shift rates if warranted. And they say the benefits of clearer guidance outweigh any constraints it might impose.

The Fed is also discussing setting an explicit target for “core” inflation. Core inflation excludes the volatile categories of energy and food. It’s remained historically low — currently around 1.5 percent by one measure.

Should the U.S. economy worsen, the Fed could take bolder steps, such as buying more mortgage securities. Doing so could help push down mortgage rates and help boost home purchases. The weak housing market has been slowing the broader economy.

The boldest move left would be a third round of large-scale purchases of Treasury securities. But critics say this would raise the risk of future inflation. And many doubt it would help much anyway, because Treasury yields are already near historic lows. Unless Europe’s crisis worsens and spreads, few expect another program of Treasury purchases.