The US Federal Reserve said on Wednesday the US economy was showing signs of leveling out two years after the onset of the deepest financial crisis in decades, and it moved to phase out one emergency measure.
The US central bank also kept its benchmark short-term interest rate steady near zero and said it would likely stay there for an extended period to guide the way to recovery.
The Fed made its clearest statement to date that it sees the recession nearing an end and that shattered financial markets are healing.
“Information since the Federal Open Market Committee met in June suggests economic activity is leveling out,” the Fed said, referring to its policy-setting panel. “Conditions in financial markets have improved in recent weeks.”
It is the first time since last August that the committee’s has not characterized the economy as contracting, weakening, or slowing.
Many peg the onset of the crisis to French bank BNP Paribas’ move in August 2007 to freeze funds because of problems with US subprime mortgages. In the months that followed, the US economy toppled into the most damaging financial crisis and painful recession in decades, and the economic malaise spread around the world.
“They see the worst with the economy is behind us but they don’t want to jump the gun and pull back quickly,” said Craig Thomas, a senior economist at PNC Financial Services in Pittsburgh.
The Fed cautioned that the economy remains fragile as employers continue to cut jobs and businesses trim investment.
The recession has seen tax revenues fall and spending rise, leading to a record federal budget deficit expected to top US$1.84 trillion in the current fiscal year.
Recent reports imply that the economy may be coming out of its swoon and that job losses, which have topped 6 million since the recession began in December 2007, may be moderating.
Still, the Fed renewed its warning that economic activity is likely to stay soft for “a time.”
Household spending, while stabilizing, is still weak as a result of the grim labor market and tight credit, it said.
To quell worries the Fed’s bloated balance sheet may sow the seeds of dangerous inflation once the recovery gains traction, Fed Chairman Ben Bernanke has taken pains to explain the Fed has tools to pull money out of the financial system to prevent price pressures from building.
Some analysts also worry the Fed’s easy money policies are setting the stage for another asset bubble, just as an extended period of low rates in the early part of the decade encouraged the housing boom that triggered the crisis.
The central bank cautiously moved to pull back some of that help for the economy on Wednesday, signaling it would slowly phase out a program to buy US$300 billion in longer-term Treasuries by the end of October.
“To promote a smooth transition in markets as these purchases of Treasury securities are completed, the committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October,” the Fed said.
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