Fed cautious on recovery, focused on joblessness

(Reuters) - The Federal Reserve showed on Wednesday it was in no rush to cut short its rescue of the U.S. economy, saying high unemployment still justified its $600 billion bond-buying plan even though the economy has shown some signs of improvement.
In a statement that was a bit more upbeat than after its meeting in December, the Fed acknowledged for the first time a rise in commodity prices that has fueled global inflation, but signaled it would not throw the U.S. central bank off course.The Fed noted that underlying U.S. inflation has been "trending downward," a contrast in tone with other central banks around the world worried about price growth.
"The economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions," the Fed said after a two-day policy meeting.
Policymakers unanimously backed continuation of the Fed's bond purchases, the first time there was no dissent since December 2009.
Analysts said the Fed, which detailed the headwinds the economy faces, may have been hesitant to sound too upbeat for fear financial markets would see any optimism as a sign that a tightening in monetary policy was drawing nearer.
"Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit," the Fed said.
U.S. interest rate futures showed traders paring bets that the central bank would start raising overnight interest rates this year. The U.S. dollar slipped and prices of U.S. government debt fell, while stocks held gains and closed marginally higher.
"The statement doesn't acknowledge the uptick in U.S. economic data that we've seen over recent weeks to the extent that we had expected that it would," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
Leading U.S. economists boosted their expectations for U.S. growth this year, according to a Reuters poll conducted after the Fed's policy statement.
The Fed's calm view of price pressures is in sharp contrast to the European Central Bank, whose president has warned that the surge in commodity prices poses an inflation threat. While headline inflation has picked up in the United States, core inflation has held near a five-decade low.
Inflation is a rising concern in emerging economies around the world. China and India both face increasing public dissent due to inflationary pressures and central banks in Latin America are considering raising rates despite worries about hurting exports.
POLICY HAS BACKING, FOR NOW
The unanimous vote suggested a firm consensus to see the bond purchase plan through, even as two known skeptics rotated into voting spots on the central bank's policy panel.
Some analysts thought at least one of the vocal inflation hawks -- Philadelphia Federal Reserve Bank President Charles Plosser or Dallas Fed President Richard Fisher -- would dissent.

By Mark Felsenthal
WASHINGTON | Wed Jan 26, 2011 7:07pm EST