Fed sees risks from Europe, some improvement in U.S.

WASHINGTON (Dec 13): The Federal Reserve on Tuesday pointed to
turmoil in Europe as a big risk to the U.S. economy, leaving the door
open to a further easing of monetary policy even as it noted some
improvement in the U.S. labor market.

The central bank characterized the U.S. economy as expanding
moderately despite an apparent slowing in global growth and said that
while there had been "some" improvement in the job market, unemployment
remained elevated and housing depressed.

"Strains in global financial markets continue to pose significant
downside risks to the economic outlook," the Fed said, alluding in a
post-meeting statement to pressures stemming from the debt crisis in the
euro zone.

Prices for U.S. stocks and government debt pared gains, while the dollar rose against the euro after the announcement.

The Fed's statement, issued after a one-day meeting, was little
changed from the announcement it released after its last gathering in
early November, and it touched only lightly on apparent improvements in
the economy's performance.

"They are certainly ready to lean against the wind should the economy
falter," said Cary Leahey, managing director at Decision Economics in
New York.

EVANS DISSENTS AGAIN

The Fed offered no new guidance on its evolving communications policy
and repeated that it expects inflation to settle at levels at or below
those consistent with its price stability mandate.

For a second consecutive meeting, Chicago Fed President Charles Evans
dissented against holding policy steady, saying he favored additional
easing now.

However, the Fed pinned uncertainty more squarely on events in
Europe. While in November it said risks to the outlook merely included
global strains, on Tuesday it linked risks directly to volatility
abroad.

The U.S. central bank has held overnight interest rates near zero
since December 2008 and has bought $2.3 trillion in government and
mortgage-related bonds in a further attempt to stimulate a robust
recovery.

Fed officials are divided among those who think high unemployment and
sluggish growth require more action and those who view the central
bank's already-aggressive efforts as bordering dangerously on an
invitation to inflation.

Some influential policymakers, including Vice Chair Janet Yellen,
have suggested they would be inclined to take additional steps if growth
fails to pick up.

Changes to the Fed's voting line-up for 2012 will remove three
policymakers known to favor a hard line against inflation, with only one
such "hawk," Richmond Fed President Jeffrey Lacker, suggesting support
for further easing may strengthen in coming months.

The Fed's activist approach to pulling the economy out of recession
and to buoying a tepid recovery stands in contrast to the European
Central Bank, which has been more tentative. The ECB held rates steady
until November before delivering two rate cuts as the euro zone began to
slide toward economic contraction.

Moreover, ECB President Mario Draghi disappointed financial markets
last week by downplaying prospects the central bank would launch an
aggressive bond-buying program to ease strains in the region.

Recent data on the U.S. economy point to some improvement. The
jobless rate tumbled 0.4 percentage point to 8.6 percent in November,
factory activity has quickened and businesses are restocking depleted
shelves.

Consumer spending also appears reasonably solid, although a
softer-than-expected report on November retail sales on Tuesday offered
a hint that it could be flagging.

The U.S. economy expanded at a 2.0 percent annual rate in the third
quarter, a welcome acceleration from a sub-1 percent pace over the first
half of the year. Forecasters hope growth will top a 3 percent rate in
the current quarter.

However, analysts say the recovery's current strength is partly a
snapback from the weakness that followed Japan's natural disasters and
high oil prices early in the year.

They caution that a return to more-sluggish growth is likely, particularly with a recession brewing in Europe.

Many observers believe the Fed will take steps to stimulate growth in
2012, first through communications measures that drive home the
expectation that interest rates will not rise for a long time, and then
through more bond buying.

Yellen has said the Fed could reinforce its ultra-accommodative
monetary stance by publishing policymakers' forecasts for the path of
interest rates. Officials are also debating whether to adopt an explicit
target for inflation.

The first step would reassure skittish markets that the Fed is not
about to tighten policy any time soon. The latter would aim to dispel
any doubts about the central bank's commitment to keeping inflation low.

Top officials have also remained open to adding bonds to the Fed's already bloated portfolio.

Some have said the central bank should resume purchases of
mortgage-backed securities to help revive the depressed housing market;
others would prefer to stick with purchases of U.S. government debt. -
Reuters