The Fed sees improving economy but keeps rates low
"Economic activity has picked up following its severe downturn," it said in a statement after its rate-setting Federal Open Market Committe meeting concluded on Wednesday. "Conditions in financial markets have improved further, and activity in the housing sector has increased." But challenges, including rising unemployment, tight credit and falling business investment haven't disappeared, and could stand in the way of a recovery, the Fed said.Of course, it's hardly a surprise that rates will remain low, even if the language is striking. The Fed cut its key rate to zero-to-one-quarter percent late last year and has kept it there all year. And there's little chance the Fed will reverse course anytime soon. As this chart shows, rates usually don't start climbing again until some time after unemployment has peaked, and few economists expect that to happen quickly.
More interesting was the Fed's move to extend one of its hugely expensive programs to inject cash into the economy.
To jump-start lending, the Fed earlier this year announced a plan to buy $1.25 trillion in mortgage-backed securities and $200 billion in other debt issued by Fannie Mae (FNM) and Freddie Mac (FRE). Those purchases were supposed to stop at the end of this year. Instead, they'll be slowly phased out by the end of the first quarter of 2010, according to the Fed.
Fed watchers have been waiting for the central bank to say something different. That made last month's meeting more interesting than usual, when it said that its plan to inject $300 billion into the economy by buying U.S. Treasury bonds would be phased out this fall. That move foreshadowed today's announcement about purchases of Fannie and Freddie debt.
The markets got another taste on Tuesday of what could come next when Bloomberg News reported that "reverse repo" agreements could be in the works. Such deals would entail the Fed selling some of the securities it owns to investment firms to remove cash from the economy.
After each of the FOMC's five previous meetings this year, its members have said they're carefully monitoring the effects of their "quantitative easing," as those liquidity-boosting measures are called. That consistency has taken much of the drama out of its meetings. But it doesn't mean they're not closely watched.
As always, even small changes to the language the Fed uses when it announces its decisions are fodder for investors' and economists' scrutiny.
For example, the Fed said in Wednesday's release that it "will continue to employ a wide range of tools to promote economic recovery and to preserve price stability." In contrast, after previous meetings this year, it said it would "employ all available tools." Setting a deadline for phasing out its debt purchases apparently puts at least one tool back in the box for now.