U.S. Fed says economy leveling out, holds key interest rate near zero
www.chinaview.cn 2009-08-13 02:19:03   Print
·Information received recently suggested "economic activity is leveling out," the Fed said.
·The Fed decided to keep a key interest rate unchanged of between zero and 0.25%.
·The Fed also noted that "economic activity is likely to remain weak for a time."

A man walks in front of the U.S. Federal Reserve building in Washington, June 24, 2009. The U.S. Federal Reserve said on Wednesday that the U.S. economic activity is "leveling out," and decided to keep a key interest rate unchanged at a record low of between zero and 0.25 percent to prop up the economy. (Xinhua/Reuters file photo)
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    WASHINGTON, Aug. 12 (Xinhua) -- The U.S. Federal Reserve said on Wednesday that the U.S. economic activity is "leveling out," and decided to keep a key interest rate unchanged at a record low of between zero and 0.25 percent to prop up the economy.

    Information received recently suggested that "economic activity is leveling out," the Fed said. But it also noted that "economic activity is likely to remain weak for a time."

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    In recent weeks, conditions in financial markets have improved further, said the central bank in a statement following its two-day policy-making meeting in Washington.

    Meanwhile, "household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit," it said, adding that "businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales."

    Although the economy is stabilizing, the Fed believes that the economy will keep a lid on inflation.

    "The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures," and the Fed "expects that inflation will remain subdued for some time," the Fed said.

    Against this backdrop, the Fed decided to hold the key interest rate, or federal funds rate, which commercial banks charge each other for overnight loans, unchanged.

    The decision means that 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 percent, the lowest rate in decades.

    Moreover, the Fed said that the interest rate is likely to remain at the current low level for "an extended period."

    The Fed also decided to stay the course on existing programs intended "to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets."

    As announced in previous meetings, the Fed will purchase a total of up to 1.25 trillion U.S. dollars of agency mortgage-backed securities and up to 200 billion dollars of agency debt by the end of the year.

    In addition, the Fed will buy up to 300 billion dollars of Treasury securities by autumn, as part of its plan to bring down interest rates it cannot directly control, according to a statement.

    The central bank also 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, versus September. Sofar, it has bought about 253 billion dollars in Treasury bonds.

    Doing so would help the ailing economy because many kinds of debt -- from mortgages to corporate bonds -- are linked to Treasury rates. Fed purchases could boost Treasury prices and drive down their rates. That would ripple through and lower rates on other kinds of debt.

    The Fed's decision to leave the interest rate unchanged was in line with economists' expectations.

    Most economists believe that the Fed will keep the target range for its bank lending rate between zero and 0.25 percent through the rest of this year and probably into next year to help spur the economy.

    Fed Chairman Ben Bernanke has predicted that the recession will end later this year. On Wednesday, the Fed said it continues to "anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability."

    The U.S. economy fell at a more subdued 1.0 percent pace in the second quarter, a strong signal that the worst recession since the Great Depression in 1930s has eased. The second-quarter fall, the fourth straight quarterly decline, was much better than the 1.5 percent annualized contraction that experts had expected.

    The U.S. GDP tumbled at a staggering 6.4 percent pace in the first quarter, the most in past three decades, a revision from an earlier estimate of a 5.5 percent rate of decline.

    The pace of job losses in the United States also narrowed in July to 247,000 and the jobless rate fell unexpectedly to 9.4 percent. Since the recession began in December 2007, the U.S economy has lost a net total of 6.7 million jobs.

    The recent data of the job market signed that "the worst may be behind us," said President Barack Obama. "We have pulled the financial system back from the brink."

    However, Obama also warned that there were still many challenges ahead.

    "We have a steep mountain to climb and we started in a very deep valley," said the president.

    "We have a lot further to go. As far as I'm concerned, we will not have a true recovery as long as we're losing jobs, and we won't rest until every American that is looking for work can find a job."

    On Wednesday, the Fed indicated that it keeps the door wide open to making changes if economic conditions warrant.

    The Fed "will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets," said the U.S. central bank in the statement.

    "The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted," it added.

Special Report:  Global Financial Crisis

Editor: Yan
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