Jan. 29 (Bloomberg) -- Federal Reserve officials warned of a prolonged global economic slowdown that may push the U.S. to the brink of deflation.

For the first time during the credit crisis, the Federal Open Market Committee’s statement yesterday indicated concern about the worldwide economy weakening “significantly,” with “some risk” that inflation would remain below ideal rates. The Fed signaled it’s moving closer to buying long-term Treasuries and expanding its $600 billion program to buy home-finance debt.

Chairman Ben S. Bernanke and his colleagues are focused on reducing a range of long-term borrowing costs to stem the longest recession since 1982. Policy makers, concluding a two-day meeting yesterday, left their target range for the main interest rate unchanged at close to zero and reiterated rates will be “exceptionally low” for “some time.”

“It’s just clear that the Fed is hoping to keep those long- term interest rates coming in a downward trend,” David M. Jones, president of DMJ Advisors LLC in Denver and a former Fed economist, said in an interview with Bloomberg Radio. “That’s the only way they can give aggregate demand a boost and help this economy at least start to get out of recession.”

U.S. gross domestic product will contract 1.6 percent, Japan’s will shrink 2.6 percent and the euro area will decline 2 percent in 2009, the International Monetary Fund said yesterday. Inflation in advanced economies may fall to a record low of 0.3 percent this year, compared with a prediction in November of 3.6 percent, the IMF said.

‘Gradual Recovery’

The Fed statement yesterday said its prediction of a “gradual recovery” in the U.S. economy later this year has “significant” risks of failing to materialize. At their meeting, central bank officials gave updated forecasts for gross domestic product, inflation and unemployment that will be released with meeting minutes on Feb. 18.

“It sounds like the worry is not so much recession as it is depression,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “We can only hope that the famous long and variable lags of monetary policy will eventually kick in.”

Even while downgrading its economic outlook, the Fed stopped short of announcing plans to buy long-term Treasuries, disappointing some investors. The yield on 30-year Treasury securities rose 17 basis points to 3.41 percent and 10-year Treasury yields jumped 12 basis points to 2.65 percent. A basis point is 0.01 percentage point.

The Fed is ready to buy “longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets,” the FOMC said. Any purchases before the FOMC’s next meeting in March would still need a vote to authorize the action.

Fed Strategy

The purchase of Treasuries would extend the Fed strategy of using its balance sheet to reduce borrowing costs. The new program may benefit several types of borrowers, because long-term government bond yields influence interest rates on mortgages, corporate bonds and municipal debt.

The central bank also “stands ready” to expand the size and duration, “as conditions warrant,” of a $600 billion program to buy housing-finance debt and securities through June. The Fed had bought about $30 billion of assets as of Jan. 21.

The statement suggests the Fed is watching to see if spreads widen between Treasury yields and rates on private securities, said Vincent Reinhart, former monetary-affairs director at the Fed Board in Washington. The Fed may also coordinate its actions with changes in the U.S. Treasury’s financial-rescue plan, said former Fed researcher John Ryding, now chief economist at RDQ Economics in New York.

‘Pumping Credit’

Central bank policy makers “mean business in increasing that balance sheet and pumping credit into an economy that needs it desperately,” Jones said.

Deflation concerns haven’t been this prominent for the FOMC since 2003, when then-Chairman Alan Greenspan cut the benchmark lending rate to 1 percent and left it there for a year. The move has been blamed by some economists for helping fuel the property and credit boom that led to the collapse of U.S. mortgage finance. Bernanke was a Fed governor at the time.

“They are doing everything they can to resist deflation,” said David Resler, chief economist at Nomura Securities International Inc. in New York. “The risk they’ll see deflation or very low inflation is a reality.”

Jeffrey Lacker, president of the Richmond Fed bank, picked up yesterday where he left off when he last voted in 2006 by casting the lone “no” vote. He dissented at the last four meetings of that year as central bankers left the main interest rate unchanged at 5.25 percent. Lacker was concerned about inflation and wanted a rate increase.

‘Targeted Credit’

Lacker’s dissent yesterday against “targeted credit programs” reflects the Richmond Fed’s concern about policies favoring specific sectors of the economy. Lacker has said in recent speeches that credit policies, such as the Fed’s purchases of mortgage-backed securities, should be handled by the Treasury.

“There is a long tradition at the Federal Reserve Bank of Richmond in arguing against credit policy,” said Reinhart, who is now a resident scholar at the American Enterprise Institute in Washington.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

Last Updated: January 29, 2009 00:01 EST