Fed reaffirms stimulus plan despite bright spots

THE GOOD AND THE BAD

In a statement, Fed officials took note of the economy's brighter signs but also nodded to the headwinds from a tighter fiscal policy in Washington. They also dropped a reference from their last policy statement that had said global financial strains were easing.

"The committee continues to see downside risks to the economic outlook," the Fed said.

Developments in Cyprus, where the prospect of a tax on bank deposits to help fund the country's bailout sent jitters through the global financial system earlier this week, likely reinforced the Fed's resolve to bolster the US economy. The levy was rejected in the Cypriot parliament, leaving the financial rescue in disarray.

Bernanke called the situation in Cyprus "difficult" because the country faces fiscal and bank-capitalization issues, as well as political stress.

"It does have some consequence," he said. "But having said that, the vote failed and the markets are up today, and I don't think the impact has been enormous."

FOOT ON THE GAS PEDAL

In its statement, the Fed reiterated that it planned to keep interest rates near zero until the jobless rate falls to 6.5 percent as long as inflation did not threaten to pierce 2.5 percent over a one- to two-year horizon.

Quarterly forecasts released along with statement showed that 13 of the 19 policymakers still think it will be appropriate to keep rates steady until sometime in 2015.

The forecasts showed only minor changes in expectations for economic growth, but were a bit more upbeat on unemployment.

Fed officials now see growth in a range of 2.3-2.8 percent in 2013, down from 2.3-3.0 percent in December.

However, they now expect the jobless rate, which registered 7.7 percent in February, to average 7.3-7.5 percent in the fourth quarter of this year. Previously, that range had been 7.4-7.7 percent. However, the unemployment rate will not fall to 6.5 percent until 2015, the estimates indicate.

One key indicator that bolstered confidence in the US recovery was a report earlier this month that showed the creation of 236,000 net new jobs in February.

If that pace of job growth can be sustained for a few months, the Fed might be able to claim substantial progress has been made toward an improved employment outlook - its own stated prerequisite for the cessation of bond buys.

A Reuters poll published a week ago found economists expect the Fed's current bond purchase plan eventually to total $1 trillion, though many see the central bank easing off on the pace of buying toward the end of the year. Analysts also see a large gap, potentially one or two years, between the time the Fed stops buying bonds and when it begins raising rates.

"The Fed's pledge to keep its foot on the gas pedal of monetary easing ... should help shore-up America's economic recovery and ensure that the US continues to outpace its major rivals in recovery," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.