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Fed expected to strike reassuring tone

/ Source: The Associated Press

Federal Reserve Chairman Ben Bernanke and his colleagues are expected to strike a reassuring tone about the country’s economic health Wednesday despite persistent worries that problems with risky mortgages could spread.

Fed policymakers opened a two-day meeting Tuesday amid mounting concern on Wall Street, Capitol Hill and elsewhere about troubles in the “subprime” mortgage market.

These lenders, who make home loans to people with blemished credit histories or low incomes, have been battered. Weak home prices and rising interest rates have made it increasingly difficult for borrowers to keep up with their payments. Delinquencies and foreclosures in the subprime mortgage market are soaring.

Economists believe the Fed will try to allay fears that the subprime mortgage industry problems could spill over into other markets and short-circuit overall economic activity.

Against this backdrop, economists predicted Fed policymakers will want to maintain their current stance and leave an important interest rate steady at 5.25 percent. If so, commercial banks’ prime interest rate for certain credit cards, home equity lines of credit and other loans, would stay at 8.25 percent.

The Fed’s key rate hasn’t budged since August. That’s given borrowers — who had endured two years of interest rate pain — time to catch their breath. Many economists predict the Fed will probably leave rates where they are for most — if not all — of this year.

An announcement of the Fed’s latest interest-rate decision will come Wednesday afternoon.

“There’s been uncertainty in the market about where the U.S. economy is heading. ... I think the Fed’s message will be one of stability,” said Oscar Gonzalez, economist at John Hancock Financial Services.

In an encouraging note Tuesday, the government reported that new-home construction rebounded in February, rising by a stronger-than-expected 9 percent from the previous month. Home building has taken a big hit from the residential real estate bust. Fed officials, however, said they have spotted tentative signs of improvement in the sector.

Fed policymakers’ meeting this week is their first since a worldwide stock market meltdown on Feb. 27, when the Dow Jones industrials suffered a 416-point plunge.

Fears about risky mortgages, economic slowdowns in two global powerhouses — the United States and China — and the possibility of a U.S. recession this year raised by former Fed chief Alan Greenspan, were factors in the market nosedive.

One day after the stock swoon, Bernanke — tackling his first financial crisis — sought to calm jittery investors. The Fed chief said nothing had altered the Fed’s outlook for moderate growth in the economy this year.

Bernanke told Congress last month that the Fed is closely monitoring the subprime situation.

“We’re watching it very carefully. We think there has been some bad underwriting in that sector. ... So that’s a significant problem. And there are obviously some financial losses associated with it,” Bernanke told the House Budget Committee on Feb. 28.

“So far, there seems to be no indication that those problems are spreading either into the broader financial markets or that they’re having significant effects on housing or housing demand in the broader economy,” he added.

The economy, however, has been feeling the strain of the housing slump. Economic growth in the final quarter of last year clocked in at a 2.2 percent pace, a sluggish performance that is expected to continue in coming months.

“The bottom line: I think you’ll see some less than spectacular economic growth figures this year, but we’re not expecting the economy to fall into a recession,” said Richard Yamarone, economist at Argus Research.

Even with lackluster economic growth, the jobs market remains in good shape. The unemployment rate dropped to 4.5 percent in February and workers got fatter paychecks even as bad winter weather sent a chill through U.S. job growth.

Inflation, meanwhile, is still running above the Fed’s 1 percent to 2 percent comfort zone. An inflation gauge closely watched by the Fed that excludes volatile energy and food, was up 2.3 percent for the 12 months ending in January.

The Fed has said repeatedly that the biggest risk facing the economy is if inflation doesn’t recede in coming months as policymakers have predicted. Given that, economists don’t believe the Fed will close the door on the possibility that rates could go up in the future.

On the other hand, the Fed has said there is also a risk that the housing slump could take an unexpected turn for the worse. Wall Street is betting the Fed’s next move will be to lower rates — perhaps later this year — to help guard against undue economic weakness.