Fed Expected to Stand Pat on Rates

By JEANNINE AVERSA

posted: 157 DAYS 23 HOURS AGO

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WASHINGTON (June 21) - With the recession easing, Federal Reserve policymakers are unlikely to launch any major new efforts to revive the economy when they meet this week. Instead, Fed Chairman Ben Bernanke and his colleagues, wary of overdoing the stimulus medicine and fanning inflation later, are expected to stand pat, economists say.

The Fed has taken unprecedented steps to try to lift the country out of recession. They include a bold effort announced in March to plow $1.2 trillion into the economy in an attempt to lower interest rates and spur more spending by Americans.

"There are a lot of good signs that an economic recovery could get under way later this year, and with inflation currently low, the Fed for now has the luxury of sitting back and watching this recovery unfold," said John Silvia, chief economist at Wachovia.

Home sales have firmed, housing construction posted a gain last month, layoffs are slowing and consumer spending is showing signs of stabilizing.

When they open a two-day meeting Tuesday, Fed policymakers are widely expected to hold a key lending rate to banks at a record low near zero and repeat a pledge to hold rates there for "an extended period." Most economists say that means the Fed will keep its targeted range for its bank lending rate between zero and 0.25 percent through the rest of this year and probably into part of next year to help brace the economy.

Analysts generally think the economy in the current April-to-June quarter is still declining — perhaps at a pace of 1 percent to 3 percent — but not nearly as much as it had been. The economy sank at a 6.3 percent rate in the final quarter of 2008 and at a 5.7 percent pace in the first quarter this year. It was the worst six-month performance in 50 years.

Bernanke has predicted the recession will end later this year. Some economists say the economy will start growing again as soon as the July-to-September quarter as the Fed's actions so far, along with the federal stimulus of tax cuts and increased government spending, take hold.

Risks to the outlook, however, abound.

Some economists and Wall Street investors have worried that a recent run-up in rates on mortgages and Treasury securities, if prolonged, could choke off prospects for an economic recovery. Some of those fears were eased last week, when rates on 30-year mortgages dipped to 5.38 percent after a string of weekly increases.

Earlier this month, Bernanke said higher rates on mortgages and longer-term Treasury securities seemed to reflect worries about the United States' huge budget deficits, as well as optimism about the economy. He said it also signaled a gradual shift by investors away from the safe haven of U.S. bonds, reversing a pattern seen in the depths of the recession.

It's possible the Fed could decide this week to boost its purchases of mortgage-backed securities and government debt, to try to drive down rates on mortgages and other consumer debt. Most analysts doubt that will happen, but economists predict the Fed will leave the door open to further action if economic conditions were to deteriorate.

"Some Fed members worry additional action could be counterproductive and actually push long-term interest rates higher because investors will fear that the Fed's actions could lead to runaway inflation down the road," said Mark Zandi, chief economist at Moody's Economy.com.

"Others think the recent rise is just a normalization of rates, reflecting investors' beliefs that the economy is heading in the right direction and that the rise won't do significant damage."

Rising unemployment, tanking home values and cracked nest eggs could force consumers to go back into hibernation again. Economists don't think that will happen, but they can't rule it out, either.

Even after the recession ends, the recovery is likely to be tepid. The nation's unemployment rate — now at 9.4 percent — is expected to keep climbing into 2010 and to hit 10 percent this year. Some say it could rise as high as 10.7 percent or 11 percent by the summer of next year before it starts to decline. The highest rate since World War II was 10.8 percent at the end of 1982.

"The Fed has to walk a fine line right now" to make investors and the public feel confident policymakers will administer the right dose of medicine to heal the economy but not so much as to cause an overdose, said Richard Yamarone, economist at Argus Research.

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2009-06-21 13:54:18