MercoPress. South Atlantic News Agency

Fed: the US economy is “picking up” but we’ll continue to pump liquidity

FMOC said spending remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit

The US Federal Reserve said that even when economic activity is “picking up”, it expects to keep interest rates close to zero for an “extended time” and will continue to support mortgage lending and housing markets and to improve overall conditions in private credit markets.

Following a two day meeting, the Federal Open Market Committee said information suggests that economic activity has picked up following its severe downturn with conditions in financial markets im proving further and activity in the housing sector has increased.

However “household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the FOMC anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability”.

The release adds that in “these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The FMOC will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period”.

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.

FOMC pledged to continue a program with 1.45 trillion USD to help keep credit flowing to the housing market and other segments of the economy by purchasing mortgage securities and other assets.

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 1.25 trillion USD of agency mortgage-backed securities and up to 200 billion USD of agency debt”. However FMOC will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.

“As previously announced, the Federal Reserve’s purchases of 300 billion USD of Treasury securities will be completed by the end of October 2009”.

Earlier this month, Federal Reserve chairman Ben Bernanke said the US economy would still feel “very weak” to US citizens concerned about job security.

Unemployment, which is set to move above 10% this year, (in several states it is already above 12%) may impact on consumer behaviour, the Fed has warned.

Finally regarding inflation prospects FMOC said that with substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, “the Committee expects that inflation will remain subdued for some time”.