The Federal Reserve didn't announce any new monetary jolts for the fading economic recovery on Tuesday, but it signaled that help could be on the way soon if conditions don't improve.
It was a largely disappointing result for investors, some of whom had hoped for bold Fed action to calm increasingly frazzled markets. Stocks seesawed on the news before rallying strongly before the bell, with the Dow closing up 429.92 points.
Following a meeting of the Federal Open Market Committee, which steers monetary policy, the central bank said it would leave interest rates at rock-bottom levels through mid-2013 -- a much longer time horizon than the Fed usually provides and one clearly intended to foster some stability in the markets.
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The Fed didn't announce a third round of quantitative easing, or any other monetary stimulus, even though the committee painted a significantly bleaker picture of the recovery than it did in June.
Instead, the committee offered a large hint that it may act at its next meeting. Members “discussed the range of policy tools available to promote a stronger economic recovery" during Tuesday's meeting, the statement said, and the Fed "will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.”
The Fed's June statement did not mention any consideration of specific policy tools.
It appears likely that any future action would come from a divided committee. On Tuesday, three of the more inflation-hawkish members dissented from the official statement over concerns that the Fed should not have pegged the end of low interest rates to such a specific date.
The statement offered an unquestionably darker assessment of a recovery that many economists fear is slipping back toward recession. In June, the committee said economic recovery was continuing “at a moderate pace.” Tuesday’s statement called economic growth this year “considerably slower than the committee had expected” and noted that downside risks to the economic outlook had increased.
Transitory factors such as higher food and energy prices and supply-chain disruptions associated with the March earthquake and tsunami in Japan, “appear to account for only some of the recent weakness in economic activity,” the Fed said.
The central bank said it anticipated that the exceptionally low federal funds rate would need to be maintained through mid-2013, adding some certainty to what had previously been called for “for an extended period.”
The statement also let the air out of inflation fears that had mounted throughout the spring and early summer as oil and food prices jumped. The committee reported that "inflation has moderated" and that it anticipates "that inflation will settle, over coming quarters, at levels at or below those consistent with" the Fed's mandate to maintain price stability -- which is to say, its unofficial inflation target of 2 percent.
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