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Archive for Thursday, August 13, 2009

Fed says economy leveling out; rates stay at record lows

August 13, 2009

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— The Federal Reserve delivered a vote of confidence in the economy Wednesday, saying it would slow the pace of an emergency rescue program and indicating the recession appears to be ending.

The central bank also held interest rates steady at record lows, with a closely watched bank lending rate near zero, and again pledged to keep them there for “an extended period” to nurture an anticipated recovery.

Fed Chairman Ben Bernanke and his colleagues said the economy appeared to be “leveling out” — a considerable upgrade from their last meeting in June, when the Fed observed only that the economy’s contraction was slowing.

“We’re no longer at DEFCON 1,” said Richard Yamarone, economist at Argus Research, referring to the defense term used to indicate being under siege. “The Fed is pulling in some of its life preservers now that the economy is no longer sinking.”

The more optimistic tone lifted Wall Street. The Dow Jones industrials gained about 120 points, or 1.3 percent, to close above 9,360 — near their highest level since the market bottomed out in early March.

The Fed said it would gradually slow the pace of its program to buy $300 billion worth of Treasury securities and shut it down at the end of October, a month later than previously scheduled.

It has bought $253 billion of the securities so far. The program is designed to force interest rates down for mortgages and other consumer debt and spur Americans to spend more money.

“I think the Fed is feeling increasingly comfortable about where the economy is going,” said Mark Zandi, chief economist at Moody’s Economy.com. “For the first time in two years, the Fed is taking one step — a baby step — toward unwinding the massive stimulus.”

The Treasury-buying program’s effectiveness has been questioned on both Wall Street and Capitol Hill, with critics saying it looks like the Fed is printing money to pay for Uncle Sam’s spending binge.

As the Fed winds down the program, rates on government debt might edge higher, economists said. But the Fed appeared to feel sufficiently secure that higher rates would not jeopardize a recovery, they said.

Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi, viewed it as a “vote of confidence that credit markets and the economic outlook has improved and will show even further improvement down the road.”

The Fed left unchanged another program that aims to push down mortgage rates. In that venture, the Fed is on track to buy $1.25 trillion worth of securities issued by mortgage finance companies Fannie Mae and Freddie Mac by the end of the year.

The central bank’s recent purchases have totaled about $543 billion, suggesting the Fed still has firepower in its arsenal.

The Fed left the target range for its bank lending rate at zero to 0.25 percent. And economists think it will stay there through the rest of this year. The rationale: Super-cheap lending will lead Americans to spend more, which will support the economy.

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