MercoPress. South Atlantic News Agency

Fed says US economy “levelling off” although activity likely to remain weak

Fed will continue to pump liquidity by purchasing up to 1.25 trillion USD of agency mortgage-backed securities and up to 200 billion of agency debt.

The Federal Reserve left US interest rates un changed between 0% and 0.25% describing the current situation as “levelling off” although economic activity is “likely to remain weak for a time”.

Following a two-day meeting the Federal Open Market Committee said in a Wednesday release that economic activity is levelling out; conditions in financial markets have improved further and household spending has continued to show signs of stabilizing.

However spending remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit while businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales.

Although economic activity is likely to remain weak for a time, the FMOC continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The latest data shows that even when US unemployment rose again last month, the 247.000 job cuts were far fewer than analysts had expected, while consumer spending had risen in June for a second successive month and worker productivity had increased at its fastest annual pace for nearly six years in the second quarter of 2009.

In addition, figures released on Wednesday showed that US exports had risen by 2% to 125.8 billion US dollars in June, a sign that the manufacturing sector was improving.

The release admits prices of energy and other commodities have risen of late, but substantial resource slack is likely to dampen cost pressures, and “the Committee expects that inflation will remain subdued for some time”.

FMOC also anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for “an extended period”. Therefore to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to 1.25 trillion USD of agency mortgage-backed securities and up to 200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying 300 billion of Treasury securities.

The Fed and the US government have carried out a number of measures to help stimulate the US economy since the end of last year. The main two have been President Obama's 787 billion USD economic stimulus package which was signed into law in February, and October's 700 billion USD Troubled Assets Relief Program for the banking sector.

US interest rates were cut to the current level of between 0% and 0.25% in December last year, where they have remained ever since.

Before then rates had fallen steadily from a high of 5.25% in September 2007.