Fed to keep buying $600 billion in Treasury bonds

The Federal Reserve said Tuesday it isn't veering from plans to buy $600 billion in Treasury bonds to lower interest rates and jolt the economy, noting the recovery isn't improving enough to cut unemployment.The central bank also gave no signal it's inclined to suspend the purchases before their scheduled completion in June despite the backlash in Congress that followed the announcement of the stimulus early last month.

In a statement after Tuesday's meeting, the Fed said it would continue to buy about $75 billion in bonds each month "to promote a stronger pace of economic recovery." It called the current pace "disappointingly slow" but suggested it could shorten or extend the program as needed.

The purchases drive up bond prices, lowering their yields. The Fed's aim is to push down interest rates that track those of long-term Treasuries, potentially spurring purchases of homes, cars and factory gear. The Fed also voted Tuesday to keep its benchmark short-term interest rate near zero, where it's been for two years.

The central bank slightly upgraded its outlook from early November, saying the "economic recovery is continuing" and "household spending is increasing at a moderate pace." But it said the rebound's pace "has been insufficient to bring down unemployment."

The Fed did not refer to recent data suggesting the recovery has gained steam lately. Retail sales are up five straight months. Consumer and small-business confidence have improved. Jobless claims have fallen sharply. Unemployment, though, rose to 9.8% in November from 9.6%.

The Fed's omission of the encouraging reports likely signals it plans to complete the bond purchases and is prepared to start another round if the jobless rate doesn't begin to fall noticeably, says economist Cary Leahey of Decision Economics.

The 10-year Treasury bond's yield closed at 3.45%, up from 3.28% Monday. Doug Roberts, chief investment strategist for Channel Capital Research, says investors likely were disappointed the Fed didn't increase its bond purchases.

Treasury yields started falling sharply in August on anticipation of the Fed initiative, but they have risen in recent weeks on the brighter economic outlook.

Also fueling higher yields: the $858 billion tax-cut package moving toward a final vote in the Senate today and investors' fears that Republican lawmakers' criticism of the Fed will keep it from starting another round. They have said the Fed's plan could cause inflation.

Many economists expect the tax-cut plan to boost economic growth about half a percentage point next year to as much as 4%. That eases pressure on the Fed to initiate more stimulus, says economist Mark Zandi of Moody's Analytics. But it will also increase the U.S. budget deficit, raising concerns that U.S. creditors will demand higher interest rates.

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