Federal Reserve Chairman Ben Bernanke said the US central bank "would not hesitate" to launch another round of bond purchases to drive borrowing costs lower if it looked like the economy needed it.
" We remain entirely prepared to take additional balance sheet actions as necessary to achieve our objectives," Bernanke told reporters. "Those tools remained very much on the table and we would not hesitate to use them should the economy require that additional support."
In response to the deepest recession in generations, the Fed lowered benchmark overnight rates to near zero in December 2008 and more than tripled its balance sheet by purchasing $US2.3 trillion in government and mortgage bonds.
While Bernanke held open the prospect of further bond buying, or quantitative easing, he did not offer any suggestion that a third round of purchases was necessarily in the offing.
In a statement after a two-day meeting on Wednesday, the Fed's policy panel reiterated its expectation that rates would not rise until late 2014 at the earliest. It took no action to change monetary policy now.
Still, fresh projections released by the Fed showed the most dovish officials no longer want to put off a rate increase until 2016.
The projections showed seven officials now believe it would be appropriate to raise borrowing costs some time in 2014, up from five in January, while only four wanted to wait longer. In January, six wanted to wait until after 2014, including two who wanted to hold off until 2016.
"It looks like the more positive data over the past few months has affected the people at the more dovish end of the spectrum," said Sean Incremona, an economist at 4Cast in New York.
The Fed bumped up its US economic growth forecast for 2012 but lowered it for the next two years. The fresh four-times-a-year forecasts showed the central bank expects the still-high 8.2 jobless rate to fall faster than it did previously.
It sees higher inflation over the next few year than it aw in January, with a notable rise in its forecast for this year. Still, it does not expect inflation to breach its 2 per cent target.
Prices for US government debt fell, the dollar rose against the euro and stocks extended gains after the central bank's projections were released.
Inflation spike seen temporary
The Fed described the economy as expanding moderately, just as it did l ast month, and said the unemployment rate had declined but remains elevated. In March, it had said the jobless rate had declined "notably."
Policymakers nodded to "some signs of improvement" in the housing sector and, while repeating that they expect moderate economic growth in coming quarters, said the recovery should then "pick up gradually."
"To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the committee expects to maintain a highly accommodative stance for monetary policy," the Fed said.
Richmond Fed President Jeffrey Lacker again dissented against the decision, saying he believed rates would need to rise sooner than late 2014.
Fed officials noted a pick up in inflation but said it was largely attributable to energy cost hikes that will affect price growth only temporarily.
Expectations for QE3 fade
As Fed officials gathered on Wednesday, the government reported that orders for long-lasting manufactured goods plunged 4.2 per cent in March, the biggest drop since the economy was nose-diving in early 2009.
The data was the latest to suggest the economy lost momentum as the first quarter drew to a close.
US economic growth has been just firm enough to weaken the case for additional stimulus through Fed purchases of government or mortgage bonds. Gross domestic product expanded at a 3 per cent annual rate in the fourth quarter but is seen slowing to around a 2.5 per cent pace in the first three months of this year.
According to a Reuters poll published last week, economists have dialed down expectations for a third round of bond purchases. The respondents saw a 30 per cent chance of more bond buys, down from 33 per cent in a poll in March.
A report early this month that showed job growth slowed sharply in March kept some hope of easing alive, and economists will look eagerly to the next round of jobs data on May 4 for more clues on where US monetary policy may be heading.