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Fed says US recovery is underway

(Agencies)
Updated: 2009-09-24 02:43

WASHINGTON: The Federal Reserve on Wednesday said that the US economy was in recovery after a severe downturn and decided to slow purchases of mortgage debt to extend that program's life until the end of next March.

The Fed, as widely expected, held overnight lending rates at close to zero percent and repeated its intention to keep rates exceptionally low for an extended period.

"Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn," the Fed said a statement.

Related readings:  Bank bullish on growing recovery  ADB: China recovery stronger than expected  Krugman: Economic recovery will be slow  Rudd calls for global action for economic recovery  Economic recovery still on track

The Fed said that it would gradually slow the pace of its purchases of mortgage-related debt in order to promote a smooth transition in markets,but reiterated it would keep its options open.

"The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook," it said.

The Fed doubled the size of its balance sheet to around $2 trillion as it flooded financial markets with money during the crisis last year. It has maintained this support through a campaign to buy $300 billion of longer-dated US government bonds and $1.45 trillion of mortgage-related debt in an effort to keep lending rates low.

The Fed opted in August to taper down the Treasury purchases by the end of October, and had been expected to opt for a similar gradual withdrawal for its mortgage debt buying, which initially had been scheduled to close at year-end.

The US central bank must walk a delicate path between acknowledging the recovery evident in the economy, and assuring investors that it remains tuned to the risks of a double dip recession as policy stimulus fades next year.

This means exiting in time from aggressive steps aimed at boosting growth to avoid igniting inflation as the economy picks up steam, while not smothering the recovery in the process.

Recent data has pointed to turnarounds in manufacturing, housing markets and consumer sentiment, and many analysts expect strong growth in the third quarter after four quarters of contraction. However, with unemployment at a 26-year high of 9.7 percent, most analysts nevertheless expect consumer spending to remain weak and damp the recovery.