By Scott Lanman March 17 (Bloomberg) — Federal Reserve officials signaled the U.S. recovery isn’t strong enough to stoke inflation, reduce unemployment quickly or justify an end to record-low interest rates. Central bankers yesterday retained a pledge to keep their benchmark rate “exceptionally low” for an “extended period,” one year after first using the phrase. While the economy is improving, employers are still reluctant to hire, homebuilding is “depressed” and inflation will be “subdued for some time,” the Federal Open Market Committee said in a statement after meeting in Washington. Chairman Ben S. Bernanke and his colleagues are waiting for sustained increases in employment before starting to exit a record expansion of credit, said Charles Lieberman , a former Fed official. Stocks and Treasuries extended gains as traders pared bets the central bank will raise rates over the next 12 months. “It’s very difficult to make a strong case that the economy is in a self-sustaining recovery until we have job growth,” said Lieberman, chief investment officer at Advisors Capital Management LLC in Hasbrouck Heights, New Jersey, and a former head of the monetary analysis staff at the New York Fed. The FOMC left the federal funds rate target for overnight loans between banks in a range of zero to 0.25 percent, where it’s been since December 2008. Officials confirmed that their program to buy $1.43 trillion of mortgage-related debt will be completed by the end of March. Eight Meetings The Fed has repeated the “extended period” language at each meeting since March 2009. Chicago Fed President Charles Evans said last week the phrase means to him three or four FOMC meetings. The Fed has eight scheduled meetings a year. Yesterday, Fed officials added language to the statement saying “housing starts have been flat at a depressed level.” A Commerce Department report showed housing starts fell 5.9 percent in February, in part because of winter storms in the Northeast and South. The economy has lost 8.4 million jobs since the recession began in December 2007. Payroll declines have slowed to an average 27,000 a month from November through February, compared with an average 252,000 from July through October. The job market is “stabilizing,” the Fed said yesterday, an upgrade from its January statement that the “deterioration in the labor market is abating.” Unemployment in February was 9.7 percent, down from a 26-year high of 10.1 percent in October. “The Fed is right to be cautious at this point,” said former Fed Governor Lyle Gramley , now senior economic adviser at Potomac Research Group in Washington. Forecasts Pushed Back Some analysts pushed back forecasts for an interest-rate increase. RBS Securities Inc. of Greenwich, Connecticut, now sees an increase in September instead of June, Michelle Girard , a senior economist, said in a note. Harm Bandholz , economist at UniCredit Global Research in New York, said the firm expects higher rates in early 2011 instead of September 2010. The median estimate of analysts surveyed by Bloomberg News this month is for an increase in November. Kansas City Fed President Thomas Hoenig dissented for the second straight meeting and stepped up his objection to the “extended period” language, saying it could “increase risks to longer-run macroeconomic and financial stability,” according to the Fed. Asset Prices Hoenig’s dissent reflects concern asset prices will rise too much because of central-bank policy, said Paul Ballew , a former Fed economist who’s now a senior vice president at Nationwide Mutual Insurance Co. in Columbus, Ohio. The Standard & Poor’s 500 Index climbed 0.8 percent to 1,159.46 yesterday, extending its advance for the year to 4 percent. The index jumped 26 percent last year. Still, “one dissenter doesn’t change Fed policy,” said John Ryding , principal at RDQ Economics LLC in New York and a former Fed researcher. The earliest the language will change in the statement is the third quarter, said Ryding, who expects a rate increase late in the first quarter of 2011. The economy will probably grow by 2.8 percent in the first quarter of 2010, according to the median estimate of a Bloomberg News survey of economists, after expanding at a 5.9 percent rate in the fourth quarter of 2009, boosted by efforts to rebuild depleted stockpiles. The FOMC avoided mention of the tools officials are developing to tighten credit and ensure $1.2 trillion in excess bank reserves don’t stoke inflation. Bernanke is scheduled to testify on the subject March 25 at the House Financial Services Committee, a hearing postponed from Feb. 10 because of a snowstorm. ‘Significantly Improves’ In testimony before the same committee today, Bernanke plans to say banking supervision by the Fed “significantly improves” its monetary policy, according to a prepared text obtained by Bloomberg News. A legislative draft by Christopher Dodd of Connecticut, chairman of the Senate Banking Committee, would strip the central bank of oversight of all financial firms except the largest. Bernanke is likely to prepare markets for rate increases with testimony or speeches, economists said. “The FOMC and the chairman are not going to want to surprise anybody,” former Richmond Fed President J. Alfred Broaddus said in a Bloomberg Television interview yesterday. To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net .
