Federal Reserve Leaders See Economic Progress
Thursday, May 21, 2009
Federal Reserve leaders said they could step up their purchases of long-term debt "to spur a more rapid pace of recovery" but saw enough tentative signs of improvement in the economy to hold off at their April meeting, according to minutes released yesterday.
Fed leaders spent much of the two-day meeting assessing their decision in March to buy up $1.25 trillion of mortgage-backed securities, $300 billion in long-term Treasury bonds and $200 billion in debt issued by government-chartered mortgage finance companies such as Fannie Mae and Freddie Mac.
The massive purchase of securities was a departure from the Fed's traditional method for regulating credit in the economy -- by adjusting a key interest rate it controls. But the Fed has already slashed that rate almost to zero.
The initial announcement of the decision in March drove mortgage rates to record lows, which set off a refinancing wave and encouraged buyers to return to the housing market. Fed officials concluded the purchases "were providing financial stimulus that would contribute to the gradual resumption of sustainable economic growth."
"I think they're content with the policy they did," said Richard Yamarone, vice president and director of economic research at Argus Research in New York. But Fed leaders also needed to tell the market they are prepared to do more because "they have to paint a picture that we stand at the ready to throw anything we can."
The Fed's purchases of long-term securities have helped expand its balance sheet to $2.2 trillion, the minutes showed. Much of that money is not circulating but sitting in bank reserves. As evidence has emerged, however, that the recession is bottoming out, the central bank has faced more questions about its ability to tighten credit and prevent inflation from growing out of control.
According to Fed leaders' latest forecast, released yesterday as part of the minutes, the economy could begin to pull out of the recession later this year. But it could take as long as six years before it fully recovers.
The economy was expected to keep shrinking this year and then expand at an annualized rate of between 2 and 3 percent in 2010, before gaining further momentum in 2011.
The unemployment rate was projected to rise to 9.2 to 9.6 percent and stay in that range through the end of next year before leveling off at 7.7 to 8.5 percent in 2011. As of April, the unemployment rate was 8.9 percent.
With so much slack in the labor market, the Fed expects inflation to stay well within its unofficial target of around 2 percent for several years.