WASHINGTON - The Federal Reserve on Wednesday dropped hints that it might need to maintain its $85 billion per month in bond purchases, which have helped keep long-term borrowing rates ultra-low.
In a statement after a two-day policy meeting, the Fed:
• Slightly downgraded its assessment of economic growth from "moderate" to "modest."
• Noted for the first time that mortgage rates, which have fueled home sales, "have risen somewhat" from record lows.
• Pointed out that inflation has fallen "persistently below" its 2 percent target. The Fed's bond purchases could help stop inflation from falling so low that it could pose a threat to the economy.
Taken together, such factors could cause the Fed to delay any pullback in bond buying beyond September.
"I don't think the Fed will be ready" to slow its bond purchases in September, said Brian Bethune, an economics professor at Westmont College in Santa Barbara, Calif. "Not only is growth running below their target, but inflation is below where they would like it to be."
The Fed expects U.S. growth to pick up in the second half of the year after running below 2 percent for the past three quarters. But it doesn't appear ready to assume it will.
Most economists believe businesses will spend more, stronger job growth will fuel more consumer spending and government spending cuts will weigh less on overall growth. Job growth has averaged 202,000 a month since January, up from 180,000 a month in the last half of 2012.
That makes Friday's July employment report even more critical to the Fed's assessment of the economy. The report is expected to show employers kept hiring at roughly the same pace in July, while the unemployment rate ticked down to 7.5 percent.
Stronger job growth has fueled speculation that the Fed could start reducing its purchases as soon as September. But economic growth remains sluggish and unemployment high at 7.6 percent.
Fed policymakers will also pay close attention to a report today on July manufacturing activity. That could give them more insight into businesses confidence in the economy and how that will affect third-quarter growth.
The Fed's statement was approved on an 11-1 vote. Esther George, the president of the Federal Reserve Bank of Kansas City, objected for the fifth straight meeting because of concerns that the bond buying could make financial markets unstable and increase the risk of inflation.