Contrasting views of the economy

WASHINGTON - The Federal Reserve on Wednesday struck a more cautious tone about the strength of the U.S. economic recovery, indicating Europe's debt crisis poses a risk to it.

Wrapping up a two-day meeting, the Fed in a 9-1 decision retained its pledge to hold rates at record-low levels for an "extended period." Doing so will energize the rebound.

But the Fed's statement after the meeting, typically scrutinized by economists and investors for clues about the central bank's intentions and its view of the economy, offered a series of contradictions.

For instance, it said the nation's economic recovery "is proceeding," but the statement went on to caution that developments abroad are making financial conditions "less supportive of growth" in the United States. While the Fed was not specific, it obviously was referring to the debt and budget-deficit problems in Greece, Britain, and elsewhere in Europe.

Similarly, the Fed said the job market was improving, but it added that U.S. businesses were not hiring.

Overall, Chairman Ben S. Bernanke and his colleagues offered a slightly more reserved outlook than the last time they convened in late April.

The comment that the economic recovery is "proceeding" was a bit less upbeat than the view at the April meeting, when the Fed said economic activity continued to "strengthen."

The decision to keep rates at record lows boosted demand for safe-haven assets such as Treasuries, sending interest rates lower. The yield on the 10-year Treasury note, a widely used benchmark for mortgages and other consumer loans, fell to 3.13 percent from 3.25 percent late Tuesday. The 10-year note has not closed at that level in more than a year. Rates had already fallen earlier in the day after the government said new-home sales dropped 33 percent last month.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, for the fourth straight meeting was the sole member to dissent from the Fed's decision to retain the "extended period" pledge.

Hoenig fears keeping rates too low for too long could unleash inflation and lead to excessive risk-taking by investors and feed new speculative bubbles in the prices of stocks, bonds, and commodities.

Wednesday's Federal Open Market Committee statement on the economy was a study in contradictions:

The economic recovery is proceeding . . . [but] financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.

The labor market is improving gradually . . . [but] employers remain reluctant to add to payrolls.

Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak.

Household spending is increasing, but it remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.

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