30/01/2013 20:20:00

UPDATE: Fed to Continue Buying Bonds

--Fed continues $85 billion in monthly bond purchases

--Fed officials note pause in economic growth

--Kansas City Fed president dissents

(Updates with comments on the economy and inflation, beginning in the second paragraph.)

By Kristina Peterson and Victoria McGrane

WASHINGTON--The Federal Reserve will continue buying bonds even as policy makers offered a mixed review of the economy on Wednesday.

Fed officials noted that economic activity had "paused in recent months," largely because of weather and other temporary factors, and stressed lingering downside risks to the economy. Fed officials, however, said they expected growth would continue at a "moderate pace" and that the jobs market would improve.

Fed officials on Wednesday held steady after months of reconfiguring their bond-buying and communications policies. In its first meeting of the year, the central bank's policy committee said it would continue purchasing $85 billion each month of long-term Treasurys and mortgage-backed securities. That keeps the Fed on course while policy makers debate internally how long to keep buying bonds as part of their effort to lower long-term interest rates to make borrowing cheaper and spur spending and investment.

The Fed's slew of bond purchases since the financial crisis has swollen its portfolio of assets, which topped $3 trillion for the first time in the week ending Jan 23. Although the Fed's bond portfolio is currently earning record amounts of interest, a recent staff analysis found that an improving economy in the future might force the Fed to sell bonds at a loss, a political headache for the central bank.

Policy makers reiterated Wednesday they plan to keep purchasing bonds until the labor market makes substantial progress. With the jobless rate at 7.8% in December and inflation well below the Fed's 2% target, Fed officials indicated their efforts are still needed to boost the economic recovery.

"Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook," the Federal Open Market Committee said in a statement at the end of its two-day meeting. Fed officials reiterated they expect inflation will stay at or below its 2% target.

While some economic indicators have shown recent improvement, others reflected the uncertainty over the U.S. budget outlook and the sharp drop in government spending that halted growth at the end of 2012. U.S. gross domestic product shrank for the first time in 3 1/2 years during the fourth quarter of 2012, contracting at an annual rate of 0.1%, the Commerce Department reported earlier Wednesday.

The Fed's reference to "transitory factors" weighing on the economy may have been a "not-so-veiled hint that there was a collapse in business activity related to concerns about the fiscal cliff," the tax increases and spending cuts slated to hit in early 2013, said Mark Luschini, chief investment strategist at Janney Montgomery Scott. Earlier this year, Congress reached a deal to avert the full force of the fiscal changes.

Fed officials spotted progress in other corners of the economy, including improvements in the household spending, business fixed investment and housing sectors.

Eleven out of 12 Fed officials voted to keep short-term interest rates near zero, where they have hovered since late 2008. The Fed expects to keep its easy-money policy in place "for a considerable time" after it stops buying bonds and the economy starts to strengthen.

In her first FOMC meeting as a voting member, Federal Reserve Bank of Kansas City President Esther George dissented because she was concerned that the "continued high level of monetary accommodation increased the risks of future economic and financial imbalances" and could push long-term inflation expectations higher. In December, policy makers spelled out for the first time that they plan to keep rates near zero until the jobless rate drops to at least 6.5%, so long as inflation remains steady.

All seven Fed governors vote at every policy meeting, as does the president of the New York Fed, William Dudley. The presidents of the 11 other regional Fed banks vote on a rotating basis. This year, along with Ms. George, St. Louis Fed President James Bullard, Chicago Fed President Charles Evans and Boston Fed President Eric Rosengren can also vote.

--Eric Morath and Jeffrey Sparshott contributed to this article.

Write to Kristina Peterson at kristina.peterson@dowjones.com and Victoria McGrane at victoria.mcgrane@wsj.com

(END) Dow Jones Newswires

January 30, 2013 15:20 ET (20:20 GMT)

Copyright (c) 2013 Dow Jones & Company, Inc.

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