Fed to Extend Emergency Lending Programs

The Federal Reserve said yesterday that it was extending many of its emergency lending programs through February because conditions in financial markets remain strained.

At the same time, it said in a statement, conditions had improved enough to scale back a few other programs, in what could be the first hints of the central bank's strategy to wind down its unprecedented support for the financial system.

Since the start of the recession in December 2007, the Fed has created more than a dozen programs to help get credit flowing again, including several that were set up under an authority reserved for "unusual and exigent circumstances." Along the way, it has tweaked and expanded them. But this is the first time programs have been scaled back or suspended.

As the economy has shown signs of stabilizing, lawmakers have begun pressing the Fed about its strategy for winding down its programs. They are concerned that the money the Fed has created, along with the federal government's stimulus spending, will cause inflation to surge once the economy recovers. Many economists think the recession could end late this year but that unemployment will continue to rise for months after that.

Fed policymakers have spoken in hypothetical terms about possible exit strategies in recent public appearances. They could, for instance, wind down short-term lending programs or adjust the interest rates that banks are charged on certain reserves.

Simon Johnson, an economist at the Massachusetts Institute of Technology, said yesterday's actions suggest the Fed is "beginning to think about looking for the exit strategy."

Some of the short-term credit facilities were expected to shrink as credit conditions improve and banks no longer need them. Fed officials said yesterday the programs that it plans to scale back have seen low demand for some time.

Credit markets have not fully recovered. As a result, Fed leaders extended the life of several programs, including one for banks, investment firms and companies that use a form of debt known as commercial paper to finance day-to-day expenses. Many of those programs were slated to end Oct. 31 and will now expire on Feb. 1, 2010.

The Fed's policymaking arm, the Federal Open Market Committee, which ended two days of meetings on Wednesday, also approved temporary extensions for currency swap lines with several foreign banks.

Fed leaders left unchanged the expiration date for the Term Asset Backed Securities Loan Facility, or TALF, a key program to shore up the market for securities backed by car loans, credit card debt and other types of consumer credit. It is set to expire at the end of this year.