The U.S. Federal Reserve is sticking to its commitment to pump another $600-billion (U.S.) of cash into the economy and keep interest rates at rock-bottom levels indefinitely.
But signs that American consumers are buying again and the prospect that Congress will soon extend massive Bush-era tax cuts means the central bank may not have to use all of its monetary tools to keep the U.S. economy afloat.
"The Fed has a little bit more breathing room," said economist Augustine Faucher of Moody's Economy.com.
Mr. Faucher said the tax deal between President Barack Obama and Congressional Republicans will take some political pressure off the Fed to continue propping up the economy with purchases of government Treasuries.
"This is good news from the central bank's perspective, as it has come under much greater scrutiny with its recent unorthodox moves," he said.
The Fed's open-market committee voted Tuesday to keep its benchmark interest at a historic low of near-zero and to continue purchasing billions more in U.S. treasuries.
"The economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment," the Fed said in a statement released after its last regularly scheduled meeting of 2010. The jobless rate hit 9.8 per cent in November.
Kansas City Federal Reserve Bank President Thomas Hoenig was again a lone voice of dissent on the committee, warning of "future economic and financial imbalances" and eventually inflation because of the bank's easy-money policies. The vote marked the last in a while for Mr. Hoenig, who is being replaced on the Fed in January as part of a regular rotation of regional bank officials.
Fed Chairman Ben Bernanke has faced widespread criticism – at home and abroad – over his decision to use the power of the Fed to keep the U.S. financial system flush with cash and encourage banks to lend.
The Fed's statement on economic conditions was virtually unchanged from previous meetings. But economists have seized on at least two key bits of news in recent days that suggest the potent U.S. economy is finally gaining some traction. Retail sales rose 0.8 per cent in November – a fifth straight monthly gain and a good sign for critical holiday sales. And weekly jobless claims are now at their lowest level in two years.
Those positive signs have prompted many economists to boost their forecasts for growth in the fourth quarter, and into next year.
Fed officials devoted at least part of Wednesday's meeting to a review of how its bond buying is going. The aim of the purchases is to keep long-term interest rates low, which encourages lending and investment.
Results so far are mixed. Bond yields are up since the Fed announced its $600-billion in Treasury purchases Nov. 3. The yield on the 10-year note reached 3.48 per cent, the highest level since May.
"The Fed was always going to leave the size of the second round of quantitative easing unchanged," Paul Dales of Capital Economics pointed out in a research note. "It is too soon to judge whether it has been a success or a failure."
As for the Fed's key interest rate, most economists don't expect the central bank to touch it until 2012 at the earliest.