By Pedro Nicolaci da Costa
WASHINGTON (Reuters) - The U.S. economy expanded at a "modest to moderate" pace in most of the country between early July and late August, according to a Federal Reserve report that was just strong enough to reinforce the prospect of a pullback in monetary stimulus.
With most Fed officials seemingly bent on moving away from controversial asset purchases aimed at keeping long-term rates down, investors are expecting the Fed to begin reducing the pace of its $85 billion monthly bond buys at policymakers' next meeting later this month.
Recent economic data has been mixed, but not weak enough to suggest any upset to a sluggish recent recovery, which is slowly bringing down unemployment.
The Beige Book report, which is compiled from conversations with Fed business contacts and was published on Wednesday, pointed to firming residential real estate activity, confirming this year's rebound in the housing market.
"Reports from several districts suggested that rising home prices and mortgage interest rates may have spurred a pickup in recent market activity, as many 'fence sitters' were prompted to commit to purchases," the report said.
Consumer spending rose in most of the Fed's 12 regional districts, with some citing back-to-school sales as a driver for retailers. The Fed's overall characterization of the economy was not much changed from the prior report.
As for jobs, hiring "held steady or increased modestly" for most occupations or industries, the report said. Loan activity was mixed, with lending standards unchanged but credit quality improving.
The U.S. economy expanded 2.5 percent in the second quarter. But with overseas economies slowing, there are fears about whether forecasts for a strong second half will come true.
Economists are awaiting Friday's employment report for August, which is expected to show 180,000 new jobs were created - not spectacular, but probably enough to meet the Fed's criteria of "substantial improvement."
Unemployment is forecast to remain steady at a historically-elevated 7.4 percent, according to a Reuters poll.
In response to the deepest recession in generations, the U.S. central bank not only slashed official borrowing costs to effectively zero but is also on track to buy over $3 trillion in mortgage and Treasury bonds to help spur lending and growth.
There is wide disagreement, even among Fed officials, about how effective these policies have been.
San Francisco Fed President John Williams indicated on Wednesday his own preference for employing forward guidance about the likely future path of rates as a primary tool of policy rather than asset buying.
"If economy were to slow and inflation were to drift below what we would like," the Fed's "first" tool to ease policy further should be interest-rate guidance, Williams said.
(Additional reporting by Ann Saphir in Portland; Editing by Krista Hughes)