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FOMC Moves Modestly to Boost Economy

With a lone dissent, the ""Federal Open Market Committee"":http://www.federalreserve.gov/monetarypolicy/fomc.htm Wednesday voted no change in the target federal funds rate but agreed to expand its program to stimulate the economy by purchasing Treasury securities.

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While voting no change in the target Fed funds rate, the FOMC said it would ""purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less [to] put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative.""

The action is expected to keep mortgage rates at record lows.

After the meeting, the FOMC released its quarterly forecast of the economy and interest rates with more members of the committee seeing higher rates in 2014 than in the prior forecast.

On its assessment of the economy after a two-day meeting, the FOMC said ""growth in employment has slowed in recent months and the unemployment rate has declined but remains elevated.""

That contrasted with the statement at the conclusion of the April meeting when the committee said ""labor market conditions have improved.""

The FOMC Wednesday also acknowledged ""household spending appears to be rising at a somewhat slower pace than earlier in the year"" and repeated its view that ""despite some signs of improvement, the housing sector remains depressed.""

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The committee dialed back its outlook saying in its statement it ""expects economic growth to remain moderate over coming quarters and then to pick up very gradually"" adding the adjective ""very"" to the long-term view.

The FOMC revised the outlook for inflation and said it anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate."" In April the committee correctly forecast ""The increase in oil and gasoline prices earlier this year is expected to affect inflation only temporarily.""

This was the first meeting in which newly confirmed members Jerome H. Powell and Jeremy C. Stein. They both voted with majority. As he had in March and April, Richmond Fed President Jeffrey Lacker cast the only vote against the policy decision.

In their forecasts, FOMC participants lowered improved their outlook for GDP growth this year to a range of 1.9 to 2.4 percent from 2.4 to 2.9 percent in April. The outlook for GDP growth in 2013 and 2014 was also reduced.

The forecasts for the unemployment rate were also less optimistic: A range of 8.0 to 8.2 percent this year compared with the April forecast of 7.8 percent to 8.2 percent. Unemployment rate forecasts for 2013 and 2014 were also higher than they were in April.

Inflation forecasts for all three years in the forecast horizon were also lower than they had been in April.

As it had in April, the FOMC said it decided ""to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions - including low rates of resource utilization and a subdued outlook for inflation over the medium run - are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.""

The committee said it would maintain ""its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities"" but dropped from its statement the commitment to roll over maturing Treasury securities at auction in favor of purchasing new Treasury securities.

About Author: Mark Lieberman

Mark Lieberman is the former Senior Economist at Fox Business Network. He is now Managing Director and Senior Economist at Economics Analytics Research. He can be heard each Friday on The Morning Briefing on POTUS on Sirius-XM Radio 124.
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