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Fed Will Hold Down Rates, Citing Tenuous Recovery
By CATHERINE RAMPELL
Published: December 16, 2009
WASHINGTON — The Federal Reserve said on Wednesday that it was still wary of raising interest rates because it believed the economy remained fragile but took steps to wind down emergency lending programs.
In a statement released after two days of meetings by the Federal Open Market Committee, the central bank said its benchmark overnight interest rate would remain at virtually zero, its level for the last year. The Fed repeated its expectation that it would keep rates “exceptionally low” for “an extended period.”
Most of the language in the report was unchanged from statements released after other recent Fed meetings, although it was marginally more upbeat. Together with recent comments from other economic policy makers — and Wednesday reports showing increases in housing construction and subdued inflation — the Fed’s release illustrates growing, if cautious, optimism about the economy.
The committee said that economic activity, including household spending, had continued to pick up and that the deterioration in the job market was slowing. Improvements in the financial markets have also become “more supportive of growth,” the statement said.
But businesses are still cutting back on fixed investment, and employers still appear reluctant to hire.
“Though we have begun to see some improvement in economic activity, we still have some way to go before we can be assured that the recovery will be self-sustaining,” Mr. Bernanke said in a speech at the Economic Club of Washington last week.
In its statement Wednesday, the Fed said that it was gradually slowing its purchases of mortgage-backed securities and other agency debt, and that most of its emergency liquidity programs would expire in February.
The Term Asset-Backed Securities Loan Facility, created to help banks supply credit to households and small businesses by supporting the issuance of certain asset-backed securities, is still expected to end by June 30.
The statement pointedly left open the possibility of changing these plans, however.
“The market with the greatest potential to give problems for the financial system is commercial real estate, so the Fed had to drop a hint that it was keeping its options open,” said John Ryding, chief economist at RDQ Economics.
The statement comes at a time when the central bank’s response to the financial crisis — and to its denouement — is being watched closely by traders and politicians alike. Lawmakers have been threatening to take away some of the bank’s supervisory powers and subject it to greater oversight.
The Fed chairman, Ben S. Bernanke, also endured some tongue-lashings in his reconfirmation hearings this month. The Senate Banking Committee has scheduled a confirmation vote on Thursday morning. If the committee approves Mr. Bernanke for a second term, his nomination will be considered by the full Senate.
Mr. Bernanke and the Fed face a difficult balancing act in the quest to return monetary policy to normal after two years of unprecedented intervention in the credit markets.
If the Fed waits too long to raise interest rates and draw down its balance sheet, it risks severe inflation. But tightening too early, or even intimating that it could tighten soon, might spook markets and derail the recovery.
Similar concerns about timing also affect the government’s fiscal stimulus projects, too.
Economic output grew at an annualized rate of 2.8 percent in the third quarter. Consumer prices increased 0.4 percent at a seasonally adjusted rate in November, according to a government report released Wednesday morning. Additionally, the Fed’s favored barometer of inflation, a measure based on consumer spending that excludes food and energy, has increased 1.4 percent over the last year.
November’s jobs report, which was better than expected but still showed payroll job losses on net, has signaled that the job market may recover in the coming months.
Mr. Bernanke is expected to be reconfirmed by Congress to serve another four years as chairman, in spite of some vocal opposition. His current term ends Jan. 31.
In an indication of his growing popular acclaim for his handling of the crisis — if not necessarily his leadership before the crisis — Mr. Bernanke was named Person of the Year by Time magazine on Wednesday. He has received similar accolades in recent weeks from other magazines.
It's the manner of the financial industry to start working on new and exciting ways to wreck the economy just as soon as the dust settles from the last collapse. I haven't been watching as closely as I probably should, but I'm sure we have some people here who have been keeping an eye out. What's the next recession likely to look like, and who will be to blame?