Fed Essentially Declares Reccession Over
The Federal Reserve provided its most upbeat assessment yet of the economy on Wednesday, suggesting the recession is over and growth could be more robust than it previously anticipated.
But noting the economy is still relatively weak, the central bank agreed to keep a key interest rate unchanged near zero and extended its financial support for the housing market until the end of the first quarter.
"Economic activity has picked up following its severe downturn," the Fed said after its two-day meeting.
Translation? "The downturn is over," says Allen Sinai, chief economist of Decision Economics.
That echoes Fed Chairman Ben Bernanke's remarks last week that the recession is likely history. The housing market is ticking up and household spending is stabilizing, the Fed said, adding it expects its policies to "support a strengthening of economic growth."
Sinai says the more bullish language signals the Fed will likely upgrade its third-quarter growth estimate to more than 3%, in line with many economists.
But the central bank added consumer spending "remains constrained by ongoing job losses" and "tight credit," among other obstacles. The Fed had planned to complete purchases of up to $1.25 trillion of mortgage-backed securities and another $200 billion in mortgage-related debt by year's end. The initiative has lowered mortgage rates. On Wednesday, the central bank said it would buy a total of $1.25 trillion by March 31. @
"I think that's very significant" because it shows the Fed believes mortgage markets still need government support, says economist Conrad DeQuadros of RDQ Economics.
Stretching out the program, he says, ensures a smoother transition to more robust private lending.
But the maneuver also means that the Fed is slowing down its purchases amid less constrained mortgage lending, says Bruce McCain, chief investment strategist at Key Private Bank.
The Fed apparently believes mortgage markets should return to normal by spring, Sinai says.
Similarly, it agreed in August to extend its purchases of $300 billion in Treasury securities by a month until the end of October.
With factories running at less than 70% capacity, the Fed said Wednesday it's not worried about rising prices, adding "inflation will remain subdued for some time."
In turn, it reiterated that interest rates will likely stay low "for an extended period."