The Federal Reserve said Wednesday it sees signs the recession is easing and that the economic outlook has “improved modestly” since last month.
Against that backdrop, Fed Chairman Ben Bernanke and his colleagues left a key interest rate at a record low of between zero and 0.25 percent, and decided against taking any new steps to shore up the economy.
Aggressive action already taken — including a $1.2 trillion effort last month — should gradually help bolster economic activity, the Fed said. It did, however, leave the door open to future action if needed.
Fed policymakers offered a less dour assessment of the economy than the one provided at its previous meeting in mid-March.
“The economy has continued to contract, though the pace of contraction appears to be somewhat slower,” the Fed said. The worst of the recession — in terms of lost economic activity — could be past, analysts said.
The economic outlook has “improved modestly” since the March meeting, partly reflecting some easing of strains in financial markets, the Fed said. Even so, “economic activity is likely to remain weak for a time,” the Fed added.
And while consumer spending has shown “signs of stabilizing,” it is still being constrained by rising unemployment, falling home values and hard-to-get credit, the Fed said.
Just hours before the Fed’s announcement, the Commerce Department reported that the economy shrank at a worse-than-expected 6.1 percent pace in the first quarter as businesses cut back sharply. The weak economic performance nearly matched the 6.3 percent contraction in the final three months of last year, which was the worst pace in a quarter-century.
However, consumer spending rebounded in the January-March period, feeding hope of economic improvements ahead. Analysts stuck to predictions that the economy would shrink much less in the current quarter percent as the administration’s $787 billion stimulus plan begins to take hold. Analysts also expect the economy will start to grow again later this year.
Still, weak sales and credit difficulties have forced businesses to cut spending and lay off workers, the Fed said.
To nurture economic activity, the Fed pledged anew to keep its key bank lending rate at a record low “for an extended period.” Economists predict the Fed will keep the rate there well into next year.
Looking ahead, the Fed didn’t rule out expanding existing programs or creating new ones to bolster the economy.
At its March meeting, the Fed launched a $1.2 trillion effort to lower interest rates and get Americans to boost spending, which would help spur economic activity.
Specifically, the Fed in March said it would start buying government debt — $300 billion over the next six months. So far, the Fed has bought $73.7 billion worth of government securities under that program.
The central bank also said it would buy an additional $850 billion worth of mortgage-backed securities and debt from mortgage giants Fannie Mae and Freddie Mac.
The Fed on Wednesday said it will continue to evaluate “the timing and overall amounts” of its government securities purchases in light of evolving economic and financial conditions.
The Fed hopes its various efforts will get banks to lend again, lower interest rates and increase Americans’ appetites to spend, which would help lift the country out of a recession that began in December 2007.
Much hope is riding on the program called the Term Asset-Backed Securities Loan Facility, or TALF. It’s been hobbled by rule changes, investor worries about financial privacy and fears that participants might become ensnared in an anti-bailout backlash from the public and Congress. Just $1.7 billion in loans was requested for the second round of funding in April — down from $4.7 billion in March.
Investors use the money to buy newly issued securities backed by auto and student loans, credit cards and other debt. The program will be expanded to include commercial real-estate loans.
Bernanke has said the recession probably would end this year if the government is successful in repairing broken banking and credit systems.
However, analysts warn that any severe outbreak of the swine flu would not only clobber tourism, food and transportation industries, but crimp spending on other things if consumers get spooked. For now, analysts are hopeful that any economic fallout will be limited and short-lived. But much hinges on the scope of the flu infections and how they affect consumer behavior.
Even if the recession ends this year, the jobless rate — now at a quarter-century high of 8.5 percent — is expected to keep rising and top 10 percent early next year.
Full text of the Fed statement
Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.
In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.