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Economy slows, but Fed holds off on action

The Federal Reserve apparently practices the ancient Taoist principle of "wu wei," which means taking action by taking no action.

Despite signs that the economy has slowed since the beginning of the year, the nation's central bank took no new steps Wednesday to rev up business activity, except to leave interest rates unchanged at near zero.

"Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year," the central bank's policymaking committee said in a statement released at the conclusion of a two-day meeting.

The statement changed the tune the committee had been singing for some time: that the economy had been expanding moderately this year, although growth in employment had slowed. 

Many had expected the Fed to at least take a symbolic move to boost the sagging economy by extending the forecast for near-zero interest rates until mid-2015 from the end of 2104 now. It did not, despite an "elevated unemployment rate" and slower spending growth by American consumers assailed by a legion of worries about wages, jobs, deadlocked Washington lawmakers and a growing European debt crisis.

At the most, some had expected the central bank to announce a third round of asset purchases, known as quantitative easing, or QE3, to head off any further economic slowdown. The Fed first launched the bond-buying program in November 2008, when the economy was slumping after the financial crisis. It did a second round in 2010. 

Instead of QE3 or any other type of overt action, the Fed likely chose to wait for more data it will receive between now and when it meets again in September.

"What is coming as a sudden shock to Wall Street, was actually the responsible move by the Fed," said Todd Schoenberger, managing principal at The BlackBay Group, who added that this decision buys the Fed more time to weigh how the myriad forces being exerted on the economy will play out.

One crucial piece of data will come Friday, when the Labor Department reports on the employment situation in July. Most economists expect the unemployment rate to remain at 8.2 percent and for the economy to have created a somewhat tepid 100,000 jobs.

Job growth has slowed to an average of 75,000 jobs per month in the second quarter, from an average of 266,000 jobs per month in the first three months of the year. A slew of recent data, including sluggish consumer spending growth and a shrinking manufacturing sector, has also confirmed the economy's deceleration.

Related story: Economy may grow slowly for a long time

The Fed reiterated that it remained prepared to take action if the economy appears to be deteriorating further. "The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability," it said.

Among the worries for the Fed, is the continued debt crisis that has thrown many eurozone economies into recession and threatens the 17 nations' common currency. The Fed meets just a day before a key meeting of the European Central Bank. ECB President Mario Draghi recently ratcheted up speculation of further ECB purchases of Italian and Spanish bonds by saying he would do "whatever it takes to preserve the euro," Reuters reported.

Also looming ahead, if Congress fails to act, is a so-called "fiscal cliff" of $600 billion in savings through spending cuts and tax increases in the new year that some economists have said could throw the U.S. economy into reverse.

There's little optimism that lawmakers will resolve the issue before voters take to the polls in November to decide whether President Barack Obama deserves four more years in the Oval Office or if his rival Republican Mitt Romney will take the helm. 

"The smart money knows the Fed will not announce another QE program until after the election, unless the economy deteriorates at a remarkable pace," Schoenberger said.

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CNBC's Hampton Pearson reports that the Federal Reserve has decided to leave rates unchanged.