Fed more upbeat about economic outlook

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The Federal Reserve upgraded its outlook on the U.S. economy Tuesday, noting recent strong improvements in the job market while downplaying higher gasoline prices that are temporarily stoking inflation.

The Fed’s more confident view of the economy contributed to the biggest rally in the stock market this year, with the Dow Jones industrial average soaring 218 points to 13,178 and the tech-driven Nasdaq composite index hitting its highest point since the dot-com bubble in 2000.

Also powering the markets higher was a government report showing a robust 1.1 percent jump in retail sales last month and announcements from major banks such as J.P. Morgan that they passed stress tests administered by the Fed and can now increase their dividends and stock buybacks from investors.

In a statement following a daylong meeting of its rate-setting committee, the Fed said the improvement in the job market recently has been “notable,” although unemployment remains “elevated” at 8.3 percent. It said the economy is “expanding moderately” and it expects that to continue.

Even before the Fed’s afternoon announcement, the February retail sales report from the Commerce Department showed solid sales of cars, clothes and appliances, though some of the gains reflected an 8 percent surge in gasoline prices during the month.

The report showed consumers also spent more in December and January than previously thought.

The Fed “is clearly shifting its stance away from blanket gloom to something more realistic,” said Ian Shepherdson, an economist at High Frequency Economics, reflecting the view of many analysts that the Fed has been too pessimistic.

“The economy is on firmer footing, convincing consumers to loosen their purse strings,” said Lindsey Piegza of FTN Financial. “Taken all together, the American consumer is looking pretty healthy for the moment.”

While the Fed noted that most sectors of the economy are growing, it cited a few lingering threats, including a “depressed” housing market and strains in credit markets, although it said the financial crunch has eased amid calming developments in the European debt crisis.

The Fed said it would maintain its goal of keeping interest rates at their current record low levels through 2014, so that businesses and consumers can feel free to make long-term hiring and investment plans using loans. Such low interest rates have also been a major factor stoking rallies in stocks and other markets.

Jeffrey M. Lacker, president of the Federal Reserve Bank of Atlanta, dissented from the decision, saying the economy is strong enough that interest rates may not need to be kept so low for so long.

With the flare-up in gas prices threatening to surge to records of more than $4 a gallon again this year, the Fed took a new look at the inflation outlook and decided the threat was only temporary.

Since gasoline prices always rise during the spring as refineries purchase crude oil and prepare the highly purified gasoline blends required during the peak summer driving season, the Fed concluded, as most economists have, that the gas-price spike will fade later this summer and fall as it usually does.

“The increase in oil and gasoline prices will increase inflation temporarily,” the central bank said, but outside of the seasonal fluctuation in fuel prices, prices remain subdued and are expected to stay that way.

Still, to be sure that inflation remains contained, the Fed appeared to back off recent hints that it was prepared to take further extraordinary action to nurture growth in the economy. While the Fed said that additional efforts are still possible, its statement suggested it is more alert to the need to ward off inflation.

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