Fed holds rates at record low to aid recovery
WASHINGTON
The Fed's statement sketched a mixed picture of the economy.
Pointing to weakness, it noted that bank lending is contracting.
And it dropped a reference in its previous statement to an
improving housing market.
But on the positive side, the Fed said business spending on
equipment and software seems to be rising. And it said economic
activity "continues to strengthen."
The Fed said it still expects to end a $1.25 trillion program
aimed at driving down mortgage rates as scheduled on March 31. Yet
it reiterated that it remains open to changing that timetable if
necessary.
Reports on home sales this week pointed to a still-fragile
housing market.
The Fed member who opposed the decision to retain a pledge to
keep rates at record lows for an "extended period" was Thomas
Hoenig, president of the Federal Reserve Bank of Kansas City.
Hoenig said the economy has improved sufficiently to drop the
pledge, which has been in place for nearly a year.
With the economy on the mend, the Fed this year can focus on how
and when to pull back the stimulus money pumped out to fight the
financial crisis. Fed Chairman Ben Bernanke will lead that effort
now that his prospects for another four-year term have improved.
The Senate is slated to vote on his confirmation on Thursday.
Bernanke's term expires Jan. 31.
Bernanke and his colleagues will need to tread delicately.
Reeling in the stimulus too soon risks short-circuiting the
recovery, sending unemployment higher. If they move too late, they
could unleash inflation.
Taking stock of the economy, Fed policymakers said the
deterioration in the job market is easing and consumers are
spending moderately. But they warned that double-digit
unemployment, lackluster income growth and tight credit could crimp
that spending.
Against that backdrop, the Fed kept its target range for its
bank lending rate at zero to 0.25 percent, where it's stood since
December 2008.
In response, commercial banks' prime lending rate, used to peg
rates on home equity loans, certain credit cards and other consumer
loans, will remain about 3.25 percent. That's its lowest point in
decades.
Super-low interest rates are good for borrowers who can get a
loan and are willing to take on more debt. But those same low rates
hurt savers. They're especially hard on people living on fixed
incomes who are earning measly returns on savings accounts and
certificates of deposit.
In its statement, the Fed says it can keep rates low because
inflation shouldn't be a problem. It said "slack" in the economy
-- referring to factories operating at less than full throttle and
the weak labor market -- will prevent companies from jacking up
prices.
Nonetheless, the Fed "sees the light at the end of the tunnel
for the economy," said Sung Won Sohn, economist at California
State University. "Uncertainties in the economy have diminished."
With credit clogs easing, the Fed said Wednesday that it plans
to wind down by March 8 an emergency lending program -- dubbed the
Term Auction Facility -- that provides banks with low-cost loans.
It also repeated its intentions of dismantling a handful of
other emergency lending programs set up during the financial crisis
on Feb. 1, when they are set to expire.
Most of them haven't been used in months by banks or other firms
as credit conditions have improved. Those programs include Fed
efforts to backstop the "commercial paper" market. This involves
short-term financing used by companies for expenses such as
salaries and supplies. Another program slated to end bolstered the
money market mutual fund industry.
Fed programs to provide emergency loans to investment firms and
another program for financial institutions to swap risky securities
for super-safe Treasury securities also will end Feb. 1. The Fed
also made clear that it will be wind down by then a "swap"
program with the European Central Bank, the Bank of England, the
Bank of Japan and the Swiss National Bank to provide them with U.S.
dollars, which had been in high demand during the crisis.
The end of these programs shouldn't have much economic impact
because most have fallen out of use.
A recovery from the worst recession since the 1930s is under
way, helped by the enormous government stimulus aid. But some
question whether the recovery can last once those supports are
pulled. And unemployment, now at 10 percent, is likely to remain
high and drag on the recovery. Meanwhile, lending is still not back
to normal. Banks are still failing.
On Thursday, the Senate has scheduled a vote on his confirmation
for a second term. The vote requires a 60-vote majority in the
100-member Senate to overcome procedural obstacles from Bernanke's
Senate critics. But Bernanke appears to have solidified his support
in the Senate after the White House stepped in to quell rising
opposition late last week.
Opponents -- a mix of Democrats and Republicans -- are angry over
the Fed's role in bailing out Wall Street firms. They also blame
Bernanke for failing to detect and address problems, especially a
housing bubble, that led to the crisis.