WASHINGTON (AP) — Hiring is soft. Pay is barely up. Consumers are cautious. Economic growth has yet to pick up.
And yet on Wednesday, the Federal Reserve is expected to take its first step toward reducing the extraordinary stimulus it's supplied to help the U.S. economy rebound from its deepest crisis since the Great Depression.
If it does, the Fed will likely spark a debate: Has the economy strengthened enough to withstand the pullback?
The answer might not be clear for months.
The Fed is meeting this week at a time of deepening uncertainty about who will succeed Chairman Ben Bernanke when his term ends in January. On Sunday, Lawrence Summers, who was considered the leading candidate, withdrew from consideration.
Summers' withdrawal followed growing resistance from critics. His exit could open the door for his chief rival, Janet Yellen, the Fed's vice chair. If chosen by President Barack Obama and confirmed by the Senate, Yellen would become the first woman to lead the Fed.
For months, the Fed has said it will slow its $85 billion-a-month in Treasury and mortgage bond purchases once the outlook for the job market has improved substantially. Those purchases have been designed to keep long-term loan rates low to get people to borrow and spend and invest in the stock market.
Super-low rates are credited with helping fuel a housing comeback, support economic growth, drive stocks to record highs and restore the wealth of many Americans.
Few think the Fed will significantly reduce its bond purchases — not now, anyway. Many economists think the Fed will announce when its two-day policy meeting ends Wednesday that it will slow its purchases by $10 billion — to $75 billon a month.
The pullback is expected to come from the Fed's Treasury purchases. It will likely maintain the pace of its mortgage bond buying to try to keep home-loan rates down to sustain the housing rebound.
Some had once expected a sharper first reduction in the Fed's purchases of around $20 billion a month. But that was before the government said that job growth was only modest in August and that employers added many fewer jobs in June and July than previously thought.
So why do economists think the Fed will reduce its stimulus for the economy at all?
In part, some Fed officials don't think the bond purchases are doing much good anymore. And they feel that by continuing to flood the financial system with cash, the Fed might be raising the risks of high inflation or dangerous bubbles in assets like stocks or real estate. Just the mention of a slowdown in bond purchases spooked investors. Some fear that the Fed's ultra-low-rate policies distorted the prices of some assets.
In addition, the Fed eventually needs to sell its vast investment portfolio, which is on track to top $4 trillion next year, without upsetting markets. The more the Fed expands its portfolio, the harder and more perilous the eventual sell-off could be.
And because the Fed has been raising expectations that its pullback will start as soon as September, some Fed officials may worry that defying those expectations would rattle investors.
Finally, there's Bernanke's expected departure in January. If the Fed is going to slow its stimulus, officials may not want to wait until their last meeting of the year in December, just before a new chairman takes over. That's, in part, why some think a pullback in bond purchases will be announced Wednesday.
"Bernanke may well want to have a bond-reduction program in place before a new chairman comes in," said David Wyss, a former chief economist at Standard & Poor's and now an economics professor at Brown University.
All that said, it's possible the Fed will choose not to slow its bond purchases now. In recent public remarks, some Fed officials have sounded uncertain that the economy and the job market have improved enough.
Once the Fed announces its decisions Wednesday, it will issue updated forecasts for the economy and Bernanke will hold a news conference.
Analysts expect the Fed to downgrade its economic outlook for 2013 from its previous forecast in June. That forecast estimated that the economy would grow at a still-sluggish annual rate between 2.3 percent and 2.8 percent this year. Through the first six months of 2013, the economy has grown at a much slower 1.8 percent rate.
Many think the Fed will try to cushion the response to a pullback in long-term bond purchases by stressing it has no intention of raising short-term interest rates anytime soon. The Fed has said it expects to keep its benchmark short-term rate near zero at least until the unemployment rate falls to 6.5 percent — as long as the inflation outlook remains mild.
The unemployment rate is now 7.3 percent, the lowest since 2008. Yet the rate has dropped in large part because many people have stopped looking for work and are no longer counted as unemployed — not because hiring has accelerated. Inflation is running below the Fed's 2 percent target.
Any long-term reassurances from the Fed could face skepticism from investors who know that a new chairman might alter its policymaking. In addition, up to five new officials could join the Fed's seven-member board next year.
The Fed has struggled at times to send a clear message about its likely timetable for changing policies. Yet in recent months, the Fed and Bernanke have been explicit that a pullback in bond purchases would likely start by year's end and perhaps by September.
"This is the market's consensus view, and Fed officials are the ones who have guided the market to that consensus," said Mark Zandi, chief economist at Moody's Analytics. "At this point, the Fed doesn't want to jumble its communications."
Investors have sent long-term rates up in anticipation of a slowdown in purchases. Since Bernanke first hinted in May that a pullback was likely by year's end, the rate on the 10-year Treasury note has jumped from 1.63 percent in early May to 2.89 percent.
And long-term mortgage rates have surged more than a full percentage point since May, an increase that's made home-buying more difficult for some.
David Jones, chief economist at DMJ Advisors, foresees the Fed cutting back on its purchases at a rate of about $10 billion at each meeting between now and mid-2014.
Even by that timetable, the Fed's stock of Treasury and mortgage bonds will grow: The investment portfolio will likely near $4.5 trillion by next summer. It's now a record $3.66 trillion — a four-fold increase from its level when the financial crisis erupted five years ago.
Even after new bond buying winds down, the Fed plans to keep reinvesting its bond holdings. It just won't be adding to its stockpile. It will still be providing extraordinary support for the economy.
And yet some economists remain unconvinced that now is the time to slow the purchases.
"Interest rates have already gone up as a result of their just talking about bond reductions," said Sung Won Sohn, an economics professor at California State University's Martin Smith School of Business. "If they actually began cutting bond purchases, that would push interest rates up more and damage the economy."
Wyss thinks Bernanke's imminent departure is the main factor.
"If this were a decision based on economics, I think the Fed would wait, but given the politics of a new chairman having to go before Congress for confirmation, that could be an argument for moving now," Wyss said.
The jobless rates in Missouri and Illinois are moving in opposite directions.
Despite adding 4,600 jobs in May, Missouri's rate climbed to 6.8 percent from 6.6 percent in April. For the first time in several months, the government sector added jobs.
In Illinois, the unemployment rate fell in May to 9.1 percent. It was the second straight monthly drop after a series of increases earlier this year. State officials says that May's decrease was due in part to gains in construction employment.
Illinois' jobless rate still remains much higher than the 7.6 nationwide unemployment rate for May that was reported earlier this month.
The Associated Press contributed to this report
SPRINGFIELD, Ill. (AP) - Gov. Pat Quinn says the Illinois House should act quickly to approve a pension-reform package because the state's economy depends on it.
House Speaker Michael Madigan's plan to increase employee contributions and trim benefits is scheduled for a House vote Thursday.
Years of state underfunding of pension accounts has left Illinois $97 billion short of covering future obligations.
The Democratic governor says the liability grows by $17 million a day. He says Illinois' economy won't fully recover until reform is approved.
But union representatives told a House committee Wednesday the opposite is true. Illinois Education Association President Cinda Klickna says cutting pension benefits takes away money retirees spend in local communities and especially hits teachers who don't have Social Security benefits.
The Senate's 27-7 vote Thursday sends the bill to the House, where it already faces some opposition.
House Speaker Tim Jones has said senators "over-reached" by significantly lowering the amount of tax credits available for the construction of low-income housing and the renovation of historic buildings. But Jones likes provisions in the Senate bill that create new tax credits for air cargo exports, computer data centers and investors in high-tech, start-up businesses.
Gov. Jay Nixon praised the bill Thursday for containing "long-overdue reforms" to tax credits.
A similar proposal to overhaul Missouri's tax credits failed during a 2011 special session.
In his first State of the Union address since winning re-election, Obama conceded economic revival is an "unfinished task," but he claimed clear progress and said he prepared to build on it as he embarks on four more years in office.
"We have cleared away the rubble of crisis, and we can say with renewed confidence that the state of our union is strong," Obama said in an hour-long address to a joint session of Congress and a television audience of millions.
With unemployment persistently high and consumer confidence falling, the economy remains a vulnerability for Obama and could disrupt his plans for pursuing a broader agenda, including immigration overhaul, stricter gun laws and climate change legislation.
Still, fresh off a convincing re-election win, Obama made clear in his remarks that he was determined to press his political advantage against a divided, defensive and worried Republican Party. Numerous times he urged Congress to act quickly on his priorities — but vowed to act on some issues on his own if they do not.
Obama also announced new steps to reduce the U.S. military footprint abroad, with 34,000 American troops withdrawing from Afghanistan within a year. And he had a sharp rebuke for North Korea, which launched a nuclear test just hours before his remarks, saying, "Provocations of the sort we saw last night will only isolate them further."
In specific proposals for shoring up the economy in his second term, an assertive Obama called for increased federal spending to fix the nation's roads and bridges, the first increase in the minimum wage in six years and expansion of early education to every American 4-year-old. Seeking to appeal for support from Republicans, he promised that none of his proposals would increase the deficit "by a single dime" although he didn't explain how he would pay for his programs or how much they would cost.
In the Republican response to Obama's address, rising GOP star Marco Rubio of Florida came right back at the president, saying his solution "to virtually every problem we face is for Washington to tax more, borrow more and spend more."
Sen. Rubio said presidents of both parties have recognized that the free enterprise system brings middle-class prosperity.
"But President Obama?" Rubio said. "He believes it's the cause of our problems."
Still, throughout the House chamber there were symbolic displays of bipartisanship. Rep. Tammy Duckworth, D-Ill., arrived early and sat with Sen. Mark Kirk, R-Ill., just returned in January nearly a year after suffering a debilitating stroke. As a captain in the National Guard, Duckworth lost both her legs while serving in Iraq in 2004.
A few aisles away, the top two tax writers in Congress, Rep. Dave Camp, R-Mich., and Sen. Max Baucus, D-Mont., sat together.
But as a sign that divisions still remain, three of the most conservative Supreme Court justices skipped Obama's speech. Six of the nine attended. Missing were Justices Clarence Thomas, Antonin Scalia and Samuel Alito.
Jobs and growth dominated Obama's address. Many elements of his economic blueprint were repacked proposals from his first term that failed to gain traction on Capitol Hill.
Standing in Obama's way now is a Congress that remains nearly as divided as it was during the final years of his first term, when Washington lurched from one crisis to another.
The president implored lawmakers to break through partisan logjams, asserting that "the greatest nation on Earth cannot keep conducting its business by drifting from one manufactured crisis to the next."
"Americans don't expect government to solve every problem," he said. "They do expect us to forge reasonable compromise where we can."
Yet Obama offered few signs of being willing to compromise himself, instead doubling down on his calls to create jobs by spending more government money and insisting that lawmakers pay down the deficit through a combination of targeted spending cuts and tax increases. But he offered few specifics on what he wanted to see cut, focusing instead on the need to protect programs that help the middle class, elderly and poor.
He did reiterate his willingness to tackle entitlement changes, particularly on Medicare, though he has ruled out increasing the eligibility age for the popular benefit program for seniors.
Republicans are ardently opposed to Obama's calls for legislating more tax revenue to reduce the deficit and offset broad the automatic spending cuts — known as the sequester — that are to take effect March 1. The president accused GOP lawmakers of shifting the cuts from defense to programs that would help the middle class and elderly, as well as those supporting education and job training.
"That idea is even worse," he said.
Obama broke little new ground on two agenda items he has pushed vigorously since winning re-election: overhauling the nation's fractured immigration laws and enacting tougher gun control measures in the wake of the horrific massacre of school children in Newtown, Conn. Yet he pressed for urgency on both, calling on Congress to send him an immigration bill "in the next few months" and insisting lawmakers hold votes on his gun proposals.
"Each of these proposals deserves a vote in Congress," he said. "If you want to vote no, that's your choice."
Numerous lawmakers wore green lapel ribbons in memory of those killed in the December shootings in Connecticut. Among those watching in the House gallery: the parents of 15-year-old Hadiya Pendleton, shot and killed recently in a park just a mile from the president's home in Chicago, as well as other victims of gun violence.
On the economy, Obama called for raising the federal minimum wage from $7.25 to $9 by 2015. The minimum wage has been stagnant since 2007, and administration officials said the increase would strengthen purchasing power. The president also wants Congress to approve automatic increases in the wage to keep pace with inflation.
Looking for common ground anywhere he could find it, Obama framed his proposal to boost the minimum wage by pointing out that even his GOP presidential rival liked the idea. He said, "Here's an idea that Gov. Romney and I actually agreed on last year: Let's tie the minimum wage to the cost of living, so that it finally becomes a wage you can live on."
Obama also renewed his calls for infrastructure spending, investments he sought repeatedly during his first term with little support from Republicans. He pressed lawmakers to approve a $50 billion "fix it first" program that would address the most urgent infrastructure needs.
Education also figures in Obama's plans to boost American competitiveness in the global economy. Under his proposal, the federal government would help states provide pre-school for all 4-year-olds. Officials did not provide a cost for the pre-school programs but said the government would provide financial incentives to help states.
Among the other initiatives Obama is proposing:
— A $1 billion plan to create 15 "manufacturing institutes" that would bring together businesses, universities and the government. If Congress opposes the initiative, Obama plans to use his presidential powers to create three institutes on his own.
— Creation of an "energy security trust" that would use revenue from federal oil and gas leases to support development of clean energy technologies such as biofuels and natural gas
— Doubling of renewable energy in the U.S. from wind, solar and geothermal sources by 2020.
— Launching negotiations on a free trade agreement between the U.S. and European Union
Obama also called on Congress to tackle the threat of climate change, another issue that eluded him in his first term. The president pledged to work with lawmakers to seek bipartisan solutions but said if Capitol Hill doesn't act, he'll order his Cabinet to seek steps he can take using his presidential powers.
Taking a swipe at those who question the threat of global warming, Obama said, "We can choose to believe that Superstorm Sandy, and the most severe drought in decades, and the worst wildfires some states have ever seen were all just a freak coincidence. Or we can choose to believe in the overwhelming judgment of science - and act before it's too late."
Tackling voters' rights issues, Obama announced the creation of a commission that will seek to make it easier and faster for people to cast ballots on Election Day. He used as an example the story of 102-year-old Desiline Victor, a Florida woman who waited in line to vote for several hours during the November election. Victor attended Tuesday's speech as a guest of the first lady and was applauded heartily by the lawmakers.
Obama also called on Congress to pass legislation giving the government more power to combat the rapidly growing threat of cyberattacks. And, as a down payment on that, the president announced that he has signed an executive order to fight electronic espionage through the development of voluntary standards to protect networks and computer systems that run critical infrastructure.