MARTIN CRUTSINGER,AP Economics Writers
WASHINGTON (AP) -- The Federal Reserve said Wednesday that the U.S. economy is growing only modestly, a downgrade from its June assessment. The Fed expects growth will pick up in the second half of the year, but the more cautious message may be a signal that it's not ready to slow its bond purchases soon.
In a statement after a two-day policy meeting, the Fed says it will keep buying $85 billion a month in bonds to help lower long-term interest rates. And it says it plans to hold its key short-term rate at a record low near zero at least as long as the unemployment rate stays above 6.5 percent and the inflation outlook remains mild.
Stronger job growth has fueled speculation that the Fed could start reducing its purchases as soon as September. But economic growth remains sluggish and unemployment high at 7.6 percent.
Financial markets had a muted reaction to the Fed's policy statement. The Dow Jones industrial average was up 30 points shortly after the statement was released; it was up 13 points moments before. The yield on the benchmark 10-year Treasury note was 2.64 percent, down slightly from 2.66 percent before the announcement.
At its June meeting, the Fed described economic growth as "moderate," and forecast that growth could be at least 2.3 percent for the year.
Chairman Ben Bernanke said after the June meeting that the Fed could slow the bond purchases later this year if the economy and job market continued to strengthen.
But after Wednesday's meeting, the Fed described the economy as expanding only at a "modest pace."
Earlier Wednesday, the government said the economy grew at a subpar 1.7 percent annual rate from April through June. The pace was an improvement from than the previous two quarters, which were revised lower. Still, growth remains sluggish and has been below 2 percent for three straight quarters.
Most economists, including those at the Fed, expect growth will strengthen in the second half of the year. That's because they believe businesses will spend more, stronger job growth will fuel more consumer spending and government spending cuts will weigh less on overall growth.
Job growth has averaged 202,000 a month since January, up from 180,000 a month in the last six months of 2012. That makes Friday's July employment report even more critical to the Fed's assessment of the economy. The report is expected to show employers kept hiring at roughly the same pace in July, while the unemployment rate ticked down to 7.5 percent.
Fed policymakers will also pay close attention to a report Thursday on July manufacturing activity. That could give them more insight into businesses confidence in the economy and how that will affect third-quarter growth.
The Fed's statement was approved on an 11-1 vote. Esther George, the president of the Federal Reserve Bank of Kansas City, objected for the fifth straight meeting because of concerns that the bond buying could make financial markets unstable and increase the risk of inflation.