Economy ready for growth

The U.S. economy may be over the worst of the recession and ready for stronger growth, if early positive trends detected by the Federal Reserve hold true.

In a Dec. 16 statement, the Federal Reserve pointed to several areas of the economy that have strengthened: The housing sector has shown signs of improvement. Consumer spending has begun to increase at a moderate pace. Businesses have continued to better align their inventory with sales, and financial market conditions have become more supportive of economic growth.

Broadly, these signs “suggests that economic activity has continued to pick up,” the Fed said.

Fed expects to keep interest rate low
Given that, the Federal Reserve decided to keep the federal funds interest rate at the same low level of just zero to 0.25 percent. The Fed also reiterated that the interest rate is likely to be kept at “exceptionally low levels…for an extended period.” The federal funds rate isn’t the same rate that consumers pay for home loans, auto loans or credit cards, but those rates are more likely to stay lower if the federal funds rate is low.

The Fed’s outlook for the future has become more positive as well. The Fed predicted that its own policies and market forces will “contribute to a strengthening of economic growth” and a “gradual return” to higher employment. The Fed also expects that inflation “will remain subdued for some time.”

But rates could rise as Fed ends programs
One element of uncertainty concerns the Fed’s plans to end some policies and programs that have helped to keep interest rates at such low levels. Specifically, the Fed has been buying $1.25 trillion of agency mortgage-backed securities and $175 billion of agency debt. These programs are expected to be finished by the end of March 2010. The Fed also is ready to end several other programs within the next three-to-six months.

Analysts have suggested that the end of these programs could kick interest rates up a notch. But the Fed responded in its statement that it is prepared to change its plans if that becomes necessary to support financial stability and economic growth.

 

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