WASHINGTON - — WASHINGTON - -With the recession easing, the Federal Reserve reached a new milestone Wednesday after two years of unprecedented intervention in the economy: It began the pullback.
The central bank said that in October it will wind down a program to purchase U.S. government bonds, a first step in what could be a multiyear high-wire act. The Fed wants to remove its supports for the economy soon enough to prevent inflation but not so soon that the fragile recovery is quashed.
After a two-day meeting, Fed policymakers pointed Wednesday to evidence that "economic activity is leveling out." But they also found that "economic activity is likely to remain weak for a time." As a result, they left short-term interest rates unchanged at almost zero and offered few hints of when - or if - other lending programs might be withdrawn.
It reflects a new phase in the Fed's response to the recession. The days of announcing vast new programs almost weekly are gone. But neither are Fed officials eager to eliminate lending programs. Rather, the central bank is carefully monitoring the incipient recovery and winding down programs slowly, lest they prevent the recovery from taking hold.
"The Fed will be in wait-and-see mode for some time," said Paul Ashworth, senior U.S. economist at Capital Economics. "They want to see how the recovery begins to develop before they move on an exit strategy."
The central bank is trying to avoid the mistakes of Japanese officials in the 1990s, who repeatedly signaled that they would remove policies meant to support growth when there were only hints of economic improvement. That, in the view of many, prolonged the recession there.
On Wednesday, the policymaking Federal Open Market Committee said the Fed "will employ all available tools" to promote a recovery and that it will leave its target for short-term interest rates "exceptionally low" for an "extended period." It left that rate in a range of zero to 0.25 percent, as was widely expected.
"They're saying that they're not even going to let us think that they're looking at raising interest rates until the economy has improved significantly," said Alan Levenson, chief economist at T. Rowe Price.
When the Fed announced its plan to buy $300 billion in Treasury bonds in March, the economy was in virtual free fall, and the central bank was using all possible tools to stop the decline.
