Fed more hopeful on economy; holds record-low rate

Breaking news (photo credit: JPOST STAFF)
Breaking news
(photo credit: JPOST STAFF)
The Federal Reserve delivered a vote ofconfidence in the US economy Wednesday, saying it would slow the paceof an emergency rescue program as the recession appears to be ending.
Thecentral bank also held a key banking lending rate at a record low nearzero and again pledged to keep it there for "an extended period."
In an upgraded assessment, the Fed said the economic barometerssince its last meeting in late June suggest that "economic activity isleveling out." Conditions in financial markets also "have improvedfurther."
The Fed said it would gradually slow the pace of its program tobuy $300 billion worth of Treasury securities so that it will shut downat the end of October, a month later than previously scheduled. It hasbought $253b. of the securities so far.
The program is aimed at lowering rates on mortgagesand other consumer debt, a move to spur Americans to spend more. Butits effectiveness has been questioned by some on Wall Street and onCapitol Hill who worry that the program makes it look like the Fed isprinting money to pay for Uncle Sam's exploding deficits.
A fairly weak auction of $23b. in 10-year notes sent a clearsignal that investors were waiting to see what the Fed had to saybefore 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 asimilar auction in July. Indirect bids, an indication of foreignbuying, were lower than at recent auctions.
Meanwhile,economists predict the Fed will leave its target range for its bankinglending rate between zero and 0.25% through the rest of this year. Therationale: 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 commercialbanks' 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, sluggishincome growth, hits to wealth from tanking home values and stillhard-to-get credit could make Americans cautious in the months ahead,the Fed said.
The Fed expressed confidence that its low rates and otheraggressive actions so far will gradually help bolster the economy. Evenso, economic activity probably will "remain weak for a time," the Fedwarned.
Against that backdrop, the Fed said inflation was likely tostay "subdued." Fed policymakers predicted that idle factories and theweak employment market would make it hard for companies to jack upprices.
While unemployment dipped to 9.4% in July, the Fed says it islikely to top 10% this year because companies won't be in a rush tohire.
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 worthof securities issued by mortgage-finance companies Fannie Mae andFreddie Mac by the end of the year. The central bank's recent purchaseshave totaled about $542.8b.
It also didn't offer signs about the fate of another programintended to spark more lending to consumers and businesses at lowerrates.
The Term Asset-Backed Securities Loan Facility, which hadgotten off to a slow start in March, is slated to shut down at the endof December. Despite the TALF, many people are having trouble gettingloans, analysts say. More recently, the program was expanded to providerelief to the commercial real-estate market.
The Fed has been weighing whether it should end some of itsrevival programs now that signs are growing that the economy is on themend.
Factory activity is improving. Home sales are starting to pickup, although much of the activity involves people snapping upbargain-priced foreclosed properties. Companies are cutting far fewerworkers.
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 mildcontraction in the second quarter after a dizzying free-fall in theprior six months - is growing now.