On Promise Of Upswing, Fed Holds Rate Steady

The Federal Reserve issued a vote of confidence in the economy yesterday, saying it would take no new action to combat a recession that, while still severe, appears to be loosening its grip.

"Although economic activity is likely to remain weak for a time," policy actions taken so far should "contribute to a gradual resumption of sustainable economic growth," the Federal Open Market Committee, the central bank's policymaking arm, said in a statement accompanying its decision.

Recent economic data suggest the recession is closer to bottoming out. In the latest sign of improvement, the government said yesterday that orders for appliances, aircraft parts and other durable goods were up 1.8 percent last month, on the heels of an increase in April.

Such indicators "give the Fed some reassurance that the end of the recession is near, and it becomes less of a forecast and more of a reality as we go from meeting to meeting," said John Ryding of the forecasting firm RDQ Economics in New York.

After creating massive amounts of new money to shore up the financial system and taking extraordinary action to prop up the market for everything from housing to credit card debt, the nation's central bank is now in a holding pattern. Fed leaders yesterday chose to keep a key rate they control unchanged -- near zero -- and not to speed up or increase previously announced purchases of government debt and mortgage-related securities. Those purchases, part of a strategy known as quantitative easing, have recently lowered borrowing costs for consumers.

Fed leaders have now declined for two consecutive meetings to take further action to stimulate growth.

"If you were doing a progress report and had milestones every six weeks, they are right on target," said Kurt Karl, chief U.S. economist for insurance firm Swiss Re. "There's no need to change their game."

Plenty more milestones remain. As Fed leaders noted in their statement, household spending "remains constrained by ongoing job losses, lower housing wealth and tight credit." Yesterday, the Commerce Department said new-home sales dipped slightly last month, to a seasonally adjusted annual rate of 342,000.

Rising mortgage rates have helped restrain new-home sales. Long-term interest rates have edged up in part because buyers of government debt -- worried that government spending will lead to higher inflation -- are demanding a larger premium to lend.

Financial markets were waiting to see whether the central bank would do anything to counter the recent spike. Fed leaders could have stepped up their purchases of long-term Treasury bonds, for instance. But doing so could have fueled inflation fears.

By staying the course, Fed policymakers signaled that, for now, they are not going to intervene further. They view the uptick in long-term rates as a sign that investors feel confident enough about the economy to flee the safety of government bonds and return to the stock market.

The Fed's statement yesterday was also notable for what it did not say: what central bank leaders would do to withdraw the billions of dollars in new money the Fed has created.

"We didn't expect a long dissertation, but we wanted some sort of hint they are considering an exit strategy," said Sung Won Sohn, an economist at California State University. "It would have taken half a sentence to say, 'When the time comes we are ready to exit.' "

Sohn interprets the omission as evidence that Fed Chairman Ben S. Bernanke wants the central bank to remain focused on jump-starting the economy. Bernanke has previously said it is not time yet for the Fed to pull back. He has also said that inflation is unlikely to flare up because there is much slack in the economy, unemployment is expected to rise through next year, and consumers and businesses are not spending.

In their statement yesterday, Fed leaders said only that they expect "inflation will remain subdued for some time" and that economic conditions are likely to warrant low interest rates for "an extended period of time."