Fed presses forward with bond buying, cites uptick in inflation

By Michael Flaherty

WASHINGTON (Reuters) - The Federal Reserve on Wednesday pressed ahead with its plan to wind down its bond-buying stimulus and upgraded its assessment of the U.S. economy, while reaffirming it is in no rush to raise interest rates.

The central bank cut its monthly asset purchases to $25 billion from $35 billion, leaving it on course to shutter the program this fall.

The Fed reiterated that it would likely keep rates near zero for a "considerable time" after its bond buying ends and restated that an "accommodative" policy was needed.

The Fed has kept overnight rates near zero since December 2008 and has more than quadrupled its balance sheet to $4.4 trillion through a series of bond purchase programs.

But it cited improving labor market conditions and declining unemployment and acknowledged rising inflation.

"Inflation has moved somewhat closer to the Committee's longer-run objective," its policy-setting panel said after a two-day meeting.

That language was different from its last statement, suggesting the central bank is paying closer attention to inflation risks.

The government on Wednesday said the U.S. economy grew at a 4 percent annual rate in the second quarter, a figure that likely amplified the debate within the Fed about how soon rates should rise.

Some Fed officials have expressed concern that the central bank risks overstaying its welcome with low rates and fueling an unwanted level of inflation. Others, including Fed Chair Janet Yellen, have argued that considerable slack remains in the economy and are wary of moving too soon.

"The things they are telling us they're watching, like inflation and wages, aren't really flashing danger just yet," Stephen Stanley, chief economist at Pierpont Securities, said ahead of the Fed's announcement.

Although Yellen believes the nation's 6.1 percent unemployment rate overstates the health of the jobs market, she warned earlier this month that a rate hike could come "sooner and be more rapid than currently envisioned" if labor markets continue to improve more quickly than anticipated.

Payrolls processor ADP said on Wednesday U.S. companies hired 218,000 workers in July, a solid pace but a bit short of economists' forecasts. A more comprehensive report on Friday is expected to show nonfarm payrolls increased by 233,000 in July, which would mark the sixth straight month with job growth above 200,000.

After a stronger-than-expected reading on employment early this month, the median forecast of economists polled by Reuters put the first increase in rates in the second quarter of next year. Previously, it had been the third.

The forecast is in line with the prediction offered by interest-rate futures, which imply an increase in June 2015 - a prediction that held in the face of the stronger-than-expected reading on second-quarter U.S. growth.

(Reporting by Michael Flaherty; Editing by Andrea Ricci and Meredith Mazzilli)