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Confident Fed sees signs of rebound, slows pace of securities rescue

WASHINGTON — The Federal Reserve delivered a vote of confidence in the economy Wednesday, saying it would slow the pace of an emergency rescue program as the recession appears to be ending.

The Fed said it would gradually slow the pace of its program to buy $300 billion worth of Treasury securities so that it will shut down at the end of October, a month later than previously scheduled. It has bought $253 billion of the securities so far.

The program is aimed at lowering rates on mortgages and other consumer debt, a move to spur Americans to spend more. But its effectiveness has been questioned by some on Wall Street and on Capitol Hill who worry that the program makes it look like the Fed is printing money to pay for Uncle Sam's exploding deficits.

The central bank also held a key banking lending rate at a record low near zero and again pledged to keep it there for "an extended period" to nurture an anticipated recovery.

Fed Chairman Ben Bernanke and his colleagues said barometers suggest that "economic activity is leveling out." That marked an upgrade from their last meeting in June, when Fed policymakers merely observed that the recession was easing because the pace of the economy's contraction was slowing.

"I think the Fed is feeling increasingly comfortable about where the economy is going," said Mark Zandi, chief economist at Moody's Economy.com. "For the first time in two years, the Fed is taking one step — a baby step — toward unwinding the massive stimulus."

The Fed didn't make any changes to another program that aims to push down mortgage rates.

In that venture, the Fed is on track to buy $1.25 trillion worth of securities issued by mortgage finance companies Fannie Mae and Freddie Mac by the end of the year. The central bank's recent purchases have totaled about $542.8 billion.

Meanwhile, economists predict the Fed will leave its target range for its banking lending rate between zero and 0.25 percent through the rest of this year. The rationale: Super-low lending will spur Americans to spend more, which would support the economy.

If the Fed holds its key rate steady, that means commercial banks' prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will stay around 3.25 percent, the lowest in decades.

The Fed expressed confidence that its low rates and other aggressive actions so far will gradually help bolster the economy. Even so, economic activity probably will "remain weak for a time," the Fed warned.

Against that backdrop, the Fed said inflation is likely to stay "subdued." Fed policymakers predicted that idle factories and the weak employment market will make it hard for companies to jack up prices.

Record deficit keeps growing

The federal deficit climbed higher into record territory in July, hitting $1.27 trillion with two months remaining in the budget year. The Treasury Department said Wednesday that the July deficit totaled $180.7 billion, slightly more than the $177.5 billion economists had expected. The Obama administration is projecting that when the current budget year ends on Sept. 30, the imbalance will total $1.84 trillion, more than four times last year's record high.

Confident Fed sees signs of rebound, slows pace of securities rescue 08/12/09 [Last modified: Wednesday, August 12, 2009 8:53pm]
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