Fed holds policy steady, sees recession easing

Fed dents Dow
Play Video
By Alister Bull and Mark Felsenthal
WASHINGTON (Reuters) - The Federal Reserve on Wednesday stuck to its huge program of buying government and mortgage debt, which is designed to keep borrowing costs low and boost recovery, and said it saw signs that the deep U.S. recession was easing.
The U.S. central bank kept interest rates near zero percent and signaled less concern on deflation, which is considered a threat to the economy because a pattern of falling prices causes consumers and businesses to delay purchases, dragging the economy down further.
It also said inflation would "remain subdued for some time" and provided no hint on an imminent exit from bold policy easing, despite fears among investors the huge U.S. stimulus could stoke price increases.
"Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing," the Fed said in its policy statement at the end of a two-day meeting. "Conditions in financial markets have generally improved in recent months."
The Fed said it decided to hold overnight interest rates in a zero to 0.25 percent range -- the level reached in December -- and repeated that rates would likely stay unusually low for some time.
But the Fed cautioned that the economy would remain weak for a time, and the Dow Jones industrial average fell on the news. Economists said the Fed's outlook means rates will be on hold until well into 2010.
"The Fed is highly likely to hold short rates at rock-bottom levels until the volume of economic 'slack' ... is substantially lessened, which means short rates are unlikely to rise any time soon," Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut, wrote in a client note.
The dollar extended gains against the euro and the yen while prices on U.S. government debt fell in disappointment that the Fed did not increase its purchases of longer-dated Treasuries.
Nine out of the 15 primary dealers polled by Reuters said the Fed will raise interest rates in 2010, and six said the central bank will wait until 2011 before hiking rates.
QUANTITATIVE EASING
With the benchmark interbank lending rate virtually at zero, the Fed has focused on driving down other borrowing costs by buying mortgage-related debt and U.S. government bonds.
In its statement, the Fed said it would hold to a previous pledge to buy $1.45 trillion in mortgage-related securities and $300 billion in longer-term government debt.
The central bank dropped a phrase it had used in its April statement in which it warned inflation could run below desired levels for a time -- a suggestion that officials were worried about the risk of a troubling downward spiral in prices.
It also did away with a sentence in the April statement that referenced various emergency liquidity programs devised by the Fed during the crisis to stop credit markets freezing.
"The statement wisely avoiding confusing the market with exit strategy discussions but may have signaled a slight backing away from extraordinary support by dropping reference to the 'range of liquidity programs'," Michael Feroli, an economist with JP Morgan Chase, said in a note to clients. Continued...
Source: Reuters