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DJ Fed Leaves Rates Near Zero; Gives Nod To Economic Progress
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By Maya Jackson Randall and Brian Blackstone
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--U.S. Federal Reserve officials on Wednesday left official interest rates near zero but suggested the economy is on more stable ground, more confirmation that the severe recession is either already over or will be very soon.
Still, officials said they would slow up their plans to buy up to $300 billion of Treasury securities in order to provide a smooth transition in those markets. The unconventional rescue program was widely expected to expire in September. Now, the Fed plans to continue purchases through October.
"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," officials said in a statement.
In another sign the central bank's policy committee remains skeptical about the strength of the recovery, Fed officials gave no indication that they're contemplating rate hikes.
The Federal Open Market Committee voted 10-0 to maintain the target federal-funds rate for interbank lending at a record-low range of zero to 0.25%. The panel also reiterated its commitment to keeping rates low for some time.
The committee "continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period," officials said in the statement they released at the conclusion of their two-day meeting.
They added that economic acivity is "likely to remain weak for some time."
At the same time, officials tweaked their statement to acknowledge that economic data has been more upbeat.
Information "suggests that economic activity is leveling out," they said.
Since the last Fed committee meeting, the housing market has shown some signs of stabilization and there have been slow but steady improvements in manufacturing. All of this suggests a recovery from the worst financial crisis since the 1930's is under way. Also, the government's cash-for-clunkers program helped send auto sales up in July.
Additionally, the Commerce Department recently reported that economic activity fell 1.0% in the second quarter - good news given that the decline was much smaller than the contraction over the previous nine months.
The stream of improved data has prompted many Wall Street economists to upgrade their economic forecasts. Goldman Sachs, for example, is now forecasting as much as 3% Gross Domestic Product growth in the second half of this year. Some economists even believe recent data proves the 20-month-old recession ended in June.
Many economists, however, still don't expect the central bank to hike rates for at least a year due to expectations of a weak labor market and low inflation. The July employment report showed the smallest payroll drop since last August and the first decline in the unemployment rate since April 2008. Still, July's 9.4% unemployment rate proves the labor market is still incredibly weak, and a double-digit rate is still possible in the next few months.
Even if the economy does expand in the 3% range this quarter, few economists expect that type of growth to be sustained, especially if consumer spending remains depressed. Consumer spending surprisingly fell last quarter. Other reports show that Americans cut their borrowing a fifth time in June as their incomes continue to tumble.
-By Maya Jackson Randall and Brian Blackstone, Dow Jones Newswires; 202-862-9255, maya.jackson-randall@dowjones.com
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(END) Dow Jones Newswires
August 12, 2009 14:16 ET (18:16 GMT)
Copyright (c) 2009 Dow Jones & Company, Inc.- - 02 16 PM EDT 08-12-09 |
