By Pedro da Costa and Jonathan Spicer
WASHINGTON (Reuters) - The Federal Reserve on Wednesday pressed forward with its aggressive efforts to stimulate the U.S. economy through large-scale bond purchases, saying unemployment remains too high and citing "restrictive" fiscal policy.
Meeting just as turmoil in Europe took another turn for the worse, the central bank removed a key section of its policy statement indicating financial conditions had eased.
Fed officials said the world's largest economy had returned to moderate growth after a pause in the fourth quarter of last year. They also noted positive, if insufficient, strides in the labor market.
"The housing sector has strengthened further, but fiscal policy has become more restrictive," the Fed said in a nod to recent spending cuts in Washington.
Esther George of the Kansas City Fed again dissented against the decision to keep purchasing $85 billion in mortgage and Treasury bonds until the employment outlook picks up markedly.
"The committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability," the U.S. central bank said.
The Fed also released a new set of economic forecasts that may surprise some market analysts, who had predicted solid recent data might lead to upgrades in policymakers' views. Fed officials now see growth in a range of 2.3-2.8 percent in 2013, down from 2.3-3.0 percent in its December projections.
For 2014, the Fed sees U.S. GDP expanding 2.9-3.4 percent versus 3.0-3.5 percent in December.
In contrast, estimates for the unemployment rate, a key metric for the central bank, were slightly more benign, if still too high for most policymakers' comfort. The Fed now believes the jobless rate, which registered 7.7 percent in February, will average 7.3-7.5 percent in the fourth quarter of 2013, down from 7.4-7.7 percent in December.
Unemployment will not fall to 6.5 percent, the level at which central bankers have suggested they will begin to consider raising rates, until 2015, the estimates show.
Economists will next turn their attention to Fed Chairman Ben Bernanke's quarterly news conference, scheduled for 2:30 p.m. (1830 GMT).
One key indicator that bolstered confidence in the U.S. recovery was a February employment report showing a lower jobless rate, down 0.2 percentage point at 7.7 percent, and the creation of 236,000 net new jobs.
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.
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 resolve of Fed officials to bolster the U.S. economy. The levy was rejected in parliament, leaving the financial rescue in disarray.
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.
Global concerns aside, the Fed has plenty of reasons not to begin pulling back on stimulus yet. Its preferred measure of inflation continues to run below the Fed's 2 percent target and unemployment remains far above its pre-recession levels.
The Fed cut benchmark overnight rates effectively to zero in 2008 as it battled the financial crisis. It has also bought more than $2.5 trillion in Treasury and mortgage bonds to keep long-term borrowing costs low to spur consumption and investment.
Since December, the central bank has said it would keep 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 - a commitment it reiterated on Wednesday. The Fed also restated a vow to keep policy loose even as the recovery picks up.
HAWKISH RUMBLINGS
Some of the Fed's more hawkish members have opposed the latest round of bond buys, citing various concerns ranging from worries about future inflation to the prospect of financial instability. In a recent speech, Fed Board Governor Jeremy Stein highlighted the possibility that a bubble might already be forming in certain parts of the corporate bond market.
That emphasis means policymakers likely discussed potential changes to the Fed's strategy for eventually unwinding its stimulus - and Bernanke may be asked about it at his news conference.
Officials had originally planned to sell some of the assets on the central bank's $3.15 trillion balance sheet sometime after they begin raising interest rates.
But recent comments from top Fed officials, including Bernanke, suggest they are considering holding onto those assets, in part to minimize the potential for losses that would force them to halt regular remittances to the U.S. Treasury.
(Writing by Pedro Nicolaci da Costa; Editing by Andrea Ricci and Tim Ahmann)
