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Tue, Aug 11, 2009 - Page 10 News List

Fed likely to maintain low interest rate

WEAK US economic data showed positive signs that the recession was coming to an end, but Federal Reserve officials are hinting that the US economy is still fragile


With the economy strengthening but still fragile, US Federal Reserve policymakers are expected to hold a key lending rate at a record low this week and will weigh whether to extend some programs that were created to ease the financial crisis.

Fed Chairman Ben Bernanke and his colleagues are also likely to signal that while the recession is winding down, the pain isn’t over.

Though the unemployment rate dipped to 9.4 percent last month — its first drop in 15 months — economists predict it will start climbing again. Many, including people in the administration of US President Barack Obama and at the Fed, say it could still top 10 percent this year.

For months, consumers have pulled back on spending and borrowing.

To try to stimulate economic activity, Fed policymakers are all but certain to keep the target range for its bank lending rate between 0 percent and 0.25 percent at the end of their two-day meeting tomorrow.

That means 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.

Fed policymakers also will probably pledge anew to keep rates there for “an extended period,” which economists interpret to mean through the rest of the year and into part of next year.

“We’re doing everything we can to support the economy,” Bernanke said recently. “We will try to get through this process. It’s going to take some patience.”

By holding rates so low, the Fed hopes to induce consumers and businesses to boost spending, even though banks are still being stingy about extending credit.

“The Fed will be guardedly optimistic,” said Brian Bethune, economist at IHS Global Insight. “We’re seeing initial signs of the economy moving toward recovery ... [but] the underlying fundamentals are still weak.”

With numerous signs that the recession is finally ending and financial stresses easing, the Fed will consider whether some rescue programs should continue. Any such decisions, though, might not come at this week’s meeting.

One such program, aimed at driving down interest rates on mortgages and other consumer debt, involves buying US Treasuries.

The central bank is on track to buy US$300 billion in Treasury bonds by the fall; it has bought US$236 billion so far. Another program, the Term Asset-Backed Securities Loan Facility, is intended to spark lending to consumers and small businesses.

It got off to a slow start in March and is slated to shut down at the end of December.

Despite this program, many people are still having trouble getting loans, analysts say.

The Fed isn’t expected to launch any new revival efforts or change another existing program that aims to push down mortgage rates.

In that venture, the Fed is on track to buy US$1.25 trillion in securities issued by mortgage finance companies Fannie Mae and Freddie Mac by the end of the year. The central bank’s recent purchases have averaged US$542.8 billion. In the meantime, the economy has shown clear signs of improvement.

Employers cut only 247,000 jobs last month, the fewest in a year, the government said on Friday. Wages and workers’ hours also nudged up — encouraging signs that companies no longer see the need for drastic cost-cutting. Those developments could deliver a psychological boost to both companies and consumers.

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