- The Washington Times - Thursday, September 24, 2009

The Federal Reserve on Wednesday said the economy has significantly improved and likely is growing again, led by gains in the long-stalled housing market.

But the Fed said the recovery is likely to be weak, held back by consumers who remain depressed by losses of jobs and income and by businesses that continue to trim staff and investment. For that reason, the Fed said it would keep its target rate for bank lending near zero “for an extended period” to nurture the recovery.

“Economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased … but economic activity is likely to remain weak for a time,” the Fed’s rate-setting committee said in a statement after a two-day meeting.

With the housing market showing signs of revival, the Fed said it would slow down purchases of mortgage securities under a $1.45 trillion program it began early this year in an effort to stimulate housing sales through lower interest rates. The Fed said it would complete the mortgage purchases by the end of next March, rather than the end of this year, as previously planned. The Fed also affirmed its previously announced intent to stop purchasing Treasury securities by the end of October.

The Fed showed little concern about a flare-up of inflation that has worried some investors in view of the central bank’s lenient money policies.

“Inflation will remain subdued for some time,” the Fed committee said, citing substantial slack in the economy, including high unemployment and low utilization rates at factories. These will “continue to dampen cost pressures,” it said.

Brian Bethune, chief U.S. financial economist at IHS Global Insight, said the Fed had to “stick to its guns” and resist pressures to prematurely raise interest rates because of growing worries about inflation among global investors.

Instead, the Fed chose to demonstrate its resolve to slowly wean the economy off extraordinary stimulus measures it has offered in the last year by moving to phase out its efforts to reduce long-term interest rates through purchases of mortgages and bonds.

Mr. Bethune called the slowdown in mortgage purchases announced Wednesday “a savvy move” because it will give the still-struggling housing and credit markets additional time to adjust to the withdrawal of stimulus.

“It allows more time for the banking sector to rebuild capital reserves, and the housing market to gain further momentum” while preparing for a return to more normal markets, he said. “The banking system is still in a fragile state, as noncurrent loans continue to rise at a rapid rate, and roughly $70 [billion] to $90 billion in loan losses must be absorbed per quarter over the next several quarters.”

The Fed’s moves were largely expected in financial markets. Stocks rallied modestly, with the Dow Jones Industrial Average gaining 75 points in midafternoon trading after the Fed’s announcement. But by the end of the day, the Dow had retraced its gains and ended down 81 points at 9,748.

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