Economic Outlook: The Fed's new gamble

The U.S. Federal Reserve signaled a turning point in the recession, saying it would scale back on buying government bonds, a retreat from its recovery program.

So begins the delicate act of reversing expensive recovery efforts that, without the undertow of the Great Recession to slow them down, could accelerate inflation and undermine the value of the dollar.

The Fed Wednesday said the economy would "remain weak for a time," in a statement that had far less ominous tones than the bank's assessments of the past two years. The Fed said "economic activity is leveling out," although the Open Market Committee elected to keep bank-to-bank lending rates at zero to 0.25 percent, predicting it would keep rates low "for an extended period."

With a renewed focus on inflation, however, the Fed signaled its concern that recovery efforts, as the economy picks up steam, could push too far, as good programs when they are needed turn into liabilities when they are not.

The Fed said inflation will remain "subdued" for the near term.

"The Fed will be in wait-and-see mode for some time," Paul Ashworth, a senior economist at Capital Economics told The Washington Post. "They want to see how the recovery begins to develop before they move on an exit strategy."

While the Fed juggles pulling away from support programs, economists also warn the recovery could prove to be "jobless" with firms doing well, but the man on the street still stuck on the street, with hiring lagging.

University of Maryland economist Peter Morici has said the recession will return with the end of stimulus spending in 2012, due to the trade gap with China and the Organization of Petroleum Export Countries.

Both of those gaps widened in June, perhaps signaling a renewed trend toward larger trade deficits, which declined while the recession was at its worst.

On paper, it seems a blessing that productivity increased and unit labor costs declined in the second quarter. But businesses are often reluctant to rehire after learning that they can produce more at lower costs.

The Fed made no mention of scaling back on the plan to buy $1.45 trillion in mortgage related securities from the Federal Home Loan Mortgage Corp. and the Federal National Mortgage Association, which specifically pushed mortgage interest rates to historic lows this summer.

U.S. markets were already on a romp before the afternoon announcement and posted a big day Wednesday.

On Thursday, Asian markets turned higher. The Nikkei 225 in Japan rose 0.79 percent, while the Hang Seng in Hong Kong rose 2.08 percent. The Singapore Straits Times gained 1.67 percent, while the S&P/ASX in Australia jumped 2.14 percent.

In midday trading in Europe, the FTSE 100 in Britain rose 1.22 percent, while the DAX 30 in Germany gained 1.65 percent. The CAC 40 in France gained 1.18 percent, while the pan-European DJStoxx index gained 1.4 percent.