Jan. 27   Bloomberg

The Federal Reserve restated its intention to cease buying $1.25 trillion of mortgage-backed securities in March and maintained its pledge to keep interest rates near zero for an “extended period,” opening a rift among policy makers for the first time in a year.

Kansas City Fed President Thomas Hoenig dissented, saying the time had come to change the promise to keep rates low. The economy “has continued to strengthen,” the Fed said in a statement today in Washington, “although the pace of economic recovery is likely to be moderate for a time.”

The dollar strengthened and two-year Treasury notes fell the most this year as investors bet the Fed’s decision to end purchases of mortgage-backed securities, along with a more optimistic assessment of the economy, increases the odds of an interest-rate increase by October. The Federal Open Market Committee said it “will continue to evaluate its purchases of securities in light of the evolving economic outlook” and the state of financial markets.

“They’re signaling the recovery is on the mend and they’re going to have to continue monitoring conditions,” said Paul Ballew, a former Fed economist who’s now a senior vice president at Nationwide Mutual Insurance Co. in Columbus, Ohio.

The dollar advanced 0.4 percent to $1.4022 per euro at 3:53 p.m. in New York, from $1.4072 yesterday. It touched $1.3994, the strongest level since July 15. The yield on the 2-year note rose 5 basis points to 0.90 percent.

Winding Down

Policy makers are winding down the record amounts of credit they have provided since the bankruptcy of Lehman Brothers Holdings Inc. in 2008.

The Fed also repeated that it will close four facilities supporting money markets and bond dealers in February, as well as dollar swap programs with central banks in Europe and Asia.

The central bank is “prepared to modify these plans if necessary to support financial stability and economic growth,” the statement said. The Fed also said it is winding down the Term Auction Facility and will hold a final auction on March 8.

In his dissent, Hoenig said “financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted,” according to the Fed statement.

“Clearly, the president of the Kansas City Fed is looking at a recovery that’s picking up speed and is concerned that the pivot has to happen faster than the board in Washington thinks,” Ballew said. “It’s a message being sent from someone out in a part of the country where things are clearly improving more than the central office in Washington thinks.”

Confirmation Vote

Chairman Ben S. Bernanke, who tomorrow faces a procedural vote in the Senate on his confirmation for a second term, is looking for signs that the return to economic growth is generating jobs and is accompanied by an increase in credit to people and businesses. The U.S. unemployment rate held at 10 percent in December, while consumer credit dropped a record $17.5 billion in November.

“Household spending is expanding at a moderate rate, but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit,” the Fed said in its statement.

Business spending on equipment and software “appears to be picking up, but investment in structures is still contracting,” the Fed said. Employers “remain reluctant to add to payrolls.”

Job Losses

Verizon Communications Inc., coping with subscriber losses at its fixed-line phone business, said yesterday it will cut about 13,000 jobs at the division this year. Home Depot Inc., the world’s largest home-improvement retailer, also said yesterday it will pare 1,000 U.S. jobs.

Stocks have provided no increase in consumer wealth this year. The Standard & Poor’s 500 Index is down 1.8 percent, and the Nasdaq Composite Index has lost more than 2 percent. Last year, the indexes rose 23.5 percent and 43.9 percent, respectively.

Officials kept their benchmark overnight lending rate between banks in a range of zero to 0.25 percent, where it has been for more than a year. Policy makers said that low rates are contingent on “low rates of resource utilization, subdued inflation trends, and stable inflation expectations.”

Production in the U.S. rose for a sixth consecutive month in December, and housing markets are stabilizing. Industrial production rose 0.6 percent last month, pushing up factory capacity in use to 72 percent. That’s still below the average plant-use rate of 78.5 percent from 2000 through 2007.

Economy Expands

The economy expanded at a 4.6 percent annual rate in the final quarter of last year, according to the median estimate of economists surveyed by Bloomberg News. The government will release its advance report on gross domestic product Jan. 29.

Sales of existing homes rose 4.9 percent to 5.16 million in 2009, the first gain in four years, the National Association of Realtors said this week. Fed officials will be watching to see if the end of their mortgage bond purchase programs hinders a recovery in housing.

The average rate on a 30-year fixed mortgage fell to 4.99 percent the week of Jan. 21 from 5.06 percent the previous week, according to Freddie Mac of McLean, Virginia.

The 56-year-old Fed chairman’s first four-year term expires at the end of this month, and the Senate hasn’t yet confirmed the former Princeton University professor for a second four-year term.

Financial Crisis

Bernanke has presided over two years of economic growth that were followed by a financial crisis that produced the worst recession since the Great Depression. The economy contracted at a 5.4 percent annual rate in the fourth quarter of 2008 and at a 6.4 percent rate in the first quarter of 2009.

Employers cut 85,000 jobs in December, after revisions showed a gain of 4,000 in November, the first in almost two years.

Wal-Mart Stores Inc., the world’s largest retailer, will eliminate about 11,200 jobs at its Sam’s Club membership warehouse clubs in the U.S. as it hires an outside company to demonstrate products.

Dallas-based financial services company Comerica Inc. said Jan. 21 that it plans to cut 300 jobs, or about 3 percent of its total workforce, this year.

U.S. central bankers forecast in November a slow decline in unemployment this year with the jobless rate averaging 9.3 percent to 9.7 percent in the fourth quarter, according to their central tendency estimates.

“We’ll definitely see job growth in 2010,” New York Federal Reserve Bank President William Dudley told the Nightly Business Report on PBS Television Jan. 13. “Whether it’ll be sufficient to bring down the unemployment rate, materially, remains to be seen.”