The Federal Reserve delivered a vote of confidence in the economy Wednesday, saying it would slow the pace of an emergency rescue program as the recession appears to be ending.
The central bank also held a key banking lending rate at a record low near zero and again pledged to keep it there for “an extended period” to nurture an anticipated recovery.
Fed Chairman Ben Bernanke and his colleagues said barometers suggest that “economic activity is leveling out.” That marked an upgrade from their last meeting in June when Fed policymakers merely observed that the recession was easing because the pace of the economy’s contraction was slowing. The Fed also noted Wednesday that conditions in financial markets “have improved further.”
“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 Fed said it would gradually slow the pace of its program to buy $300 billion worth of Treasury securities so that it will shut 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 aimed at lowering rates on mortgages and other consumer debt, a move to spur Americans to spend more. But its effectiveness has been questioned by some on Wall Street and on Capitol Hill who worry that the program makes it look like the Fed is printing money to pay for Uncle Sam’s exploding deficits.
The minutes from the Fed’s June meeting showed officials “saw little point in extending it because a small increase in purchases would probably have little impact on yields, while a big increase might be misinterpreted as a willingness to monetize the budget deficit,” according to Capital Economics senior U.S. economist Paul Ashworth.
A fairly weak auction of $23 billion in 10-year Treasury notes sent a clear signal that investors were waiting to see what the Fed had to say before making any big moves. The yield on the benchmark 10-year note, which moves opposite its price, edged up to 3.71 percent from 3.70 percent ahead of the auction results and 3.67 percent late Tuesday.
The Fed didn’t make any changes to 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 $542.8 billion.
Meanwhile, economists predict the Fed will leave its target range for its banking lending rate between zero and 0.25 percent through the rest of this year. The rationale: super-low lending will spur Americans to spend more, which would support the economy.
If the Fed holds its key rate steady, that means commercial banks’ prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will stay around 3.25 percent, the lowest in decades.
It was the first Fed meeting since the economy has flashed more definitive signs of turning a corner.
But dangers lurk.
Although consumer spending has stabilized, job losses, sluggish income growth, hits to wealth from tanking home values and still hard to get credit could make Americans cautious in the months ahead, the Fed said.
The Fed expressed confidence that its low rates and other aggressive actions so far will gradually help bolster the economy. Even so, economic activity probably will “remain weak for a time,” the Fed warned.
Against that backdrop, the Fed said inflation is likely to stay “subdued.” Fed policymakers predicted that idle factories and the weak employment market will make it hard for companies to jack up prices.
While unemployment dipped to 9.4 percent in July, the Fed says it’s likely to top 10 percent this year because companies won’t be in a rush to hire.
The Fed didn’t offer signs about the fate of another program intended to spark more lending to consumers and businesses at lower rates.
The Term Asset-Backed Securities Loan Facility, which had gotten off to a slow start in March, is slated to shut down at the end of December. Despite the TALF, many people are having trouble getting loans, analysts say. More recently, the program was expanded to provide relief to the commercial real-estate market.
The Fed has been weighing whether it should end some of its revival programs now that signs are growing that the economy is on the mend.
Factory activity is improving. Home sales are starting to pick up, although much of the activity involves people snapping up bargain-priced foreclosed properties. Companies are cutting far fewer workers.
Some financial stresses also are easing, but lending is not flowing normally and financial markets aren’t back to full throttle.
Many analysts believe the economy — which logged a mild contraction in the second quarter after a dizzying free-fall in the prior six months — is growing now.
Text of the Fed's full statement is below:
Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, 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.
The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.
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 continues to anticipate 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 is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. 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 monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.
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.