Fed: Rising Fuel Costs Cloud U.S. Economic Outlook

Higher gasoline prices are muddying what is an otherwise improving outlook for the U.S. economy, the Federal Reserve said in a keenly watched report, published Wednesday.

In its Beige Book survey -- which frames its policy meeting later this month -- the Fed held its cautious optimism about the economy but worried about the impact of fuel prices on consumer spending.

"The economy continued to expand at a modest to moderate pace from mid-February through late March," members of Fed regional branches reported. "The near-term outlook for household spending was encouraging," they said, adding that several regions expressed concerns "that rising gas prices could limit discretionary spending in the months to come."

U.S. gasoline prices have dropped in recent weeks, but are still 3% higher than this time last year and close to the politically sensitive four dollars a gallon mark.

According to the American Automobile Association, nationwide the average cost of a gallon on Wednesday was about $3.92.

Manufacturing firms generally had the same overall view as the Fed: "Manufacturers in many districts expressed optimism about near-term growth prospects, but they are somewhat concerned about rising petroleum prices."

The Fed reported that hiring was "steady or showed a modest increase" across the country, while retail spending was up, thanks in part to unseasonably warm weather in many regions.

The residential housing market, long a drag on the recovery, also "showed some improvement."

But on the hard-hit west coast and in parts of the Midwest "activity remained lackluster."

The Federal Reserve's top policy-making body will next meet April 24-25 in Washington, where they will face questions about whether the economy needs more help from the central bank.

Although the outlook has continued to improve, the pace of growth has been too slow and the recovery too weak for those advocating a fresh splash of Fed stimulus.

With interest rates already near the lowest level possible, the Fed has been pressed to increase its bond purchases to lower effective interest rates and nudge investors towards stocks, property, or other company spending.