Fed more hopeful on economy; holds record-low rate

The Fed said the economic barometers since its last meeting in late June suggest that "economic activity is leveling out."

The Federal Reserve delivered a vote of confidence in the US 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." In an upgraded assessment, the Fed said the economic barometers since its last meeting in late June suggest that "economic activity is leveling out." Conditions in financial markets also "have improved further." 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 $253b. 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. A fairly weak auction of $23b. in 10-year notes sent a clear signal that investors were waiting to see what the Fed had to say before making any big moves. The 10-year auction's bid-to-cover ratio, a measure of demand, was 2.49 percent, down sharply from 3.28% at a similar auction in July. Indirect bids, an indication of foreign buying, were lower than at recent auctions. Meanwhile, economists predict the Fed will leave its target range for its banking lending rate between zero and 0.25% through the rest of this year. The rationale: a super-low lending rate 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%, 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 was likely to stay "subdued." Fed policymakers predicted that idle factories and the weak employment market would make it hard for companies to jack up prices. While unemployment dipped to 9.4% in July, the Fed says it is likely to top 10% this year because companies won't be in a rush to hire. 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 $542.8b. It also 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.