Fed: Recovery continues to slow

NEW YORK (CNNMoney.com) -- The U.S. economic recovery continues to lose steam, the Federal Reserve said Tuesday, but the central bank unveiled only tougher language but no new policies to try to spur growth.

While the Fed said it expects improvement ahead, it cautioned "the pace of economic recovery is likely to be modest in the near-term."

The Fed left its federal funds rate at close to 0%. That overnight lending rate, which is used as a benchmark to set the rates paid on a wide variety of business and consumer loans, has been at that level since December 2008.

The Fed's statement again promised that this rate would stay at an "exceptionally low levels" for an "extended period."

The Fed also announced it will continue to make new purchases of Treasurys with the proceeds of its earlier investments. That policy was announced at its previous meeting last month.

While the Fed did not announce any additional steps Tuesday, it was more aggressive in what it promised to do in the future if conditions weaken further. In its statement, the Fed indicated it is prepared to "provide additional accommodation" in order to "return inflation" to slightly higher levels.

Since central banks typically are more concerned with fighting, rather than feeding, inflation, the language was very unusual. It may be a sign that policymakers are more worried about the risks posed by lower prices rather than higher prices.

"That's pretty aggressive talk," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland. "They didn't draw the sword, but they sure rattled it quite a bit."

The Consumer Price Index, the government's key measure of inflation, is up only 1.1% over the last 12 months, while the core CPI, which strips out volatile food and energy prices, is up only 0.9%.

The Fed is widely believed to want to see core CPI up at least 1% to 2% in order to keep prices steady. The fear is that if prices fall, it can cause businesses to cut back production, That can lead to further job losses.

McCain said the Fed's statement lays the groundwork for the central bank to make additional purchases of assets such at Treasurys at subsequent meetings.

"This takes a major step in that direction," he said. "It's as much as they can do without announcing an actual date and details of such action."

But other experts said it may not matter what the Fed does at this point.

Sung Won Sohn, economics professor at Cal State University Channel Islands said that while the Fed has been making promises that it stands ready to act, "unfortunately, what the Fed can do to boost the economy is very limited."

Once again, Kansas City Fed President Thomas Hoenig objected to the statement and Fed policy. He argued the economy continues to recover at a moderate pace and that keeping rates so low for an extended period could lead to a new bubble in markets that will cause greater problems down the line.

Stil, the Fed said there are numerous signs of weakness in the economy, including employers reluctant to add staff, a depressed housing market, a slowdown in the growth of business investment and only modest improvement in consumer spending.

U.S. stock indexes initially moved higher on the announcement but gave up much of their gains by the end of the day. Treasury yields fell on the news.