Federal Reserve moves to exit from stimulus

Washington, Dec. 17: The Federal Reserve is edging away from massive interventions to prop up the US economy, but a pledge to stick with the record-low interest rates shows lingering concerns over the recovery, analysts said.
The central bank, concluding a two-day policy meeting on Wednesday, maintained the federal funds base rate of a range of zero to 0.25 per cent, which has been in place for the past year as part of a plan to revive economic activity.
The Federal Open Market Committee (FOMC) headed by chairman, Mr Ben Bernanke, acknowledged some improvement in economic conditions, notably in the troubled labour market, but indicated this was not enough to shift away from a massive stimulus effort. The FOMC statement said that recent data “suggests that economic activity has continued to pick up and that the deterioration in the labour market is abating.” It noted that the housing sector “has shown some signs of improvement over recent months” and that consumer spending is growing at “a moderate rate,” but is constrained by a weak labour market and tight credit.
The FOMC announced some special programmes to help restore credit would expire as scheduled. It continues the process of pumping over $1 trillion into financial markets to support the housing sector and other types of credit, but added that these programmes will be concluded as planned in early 2010. “The Fed has a slightly more upbeat tone on the economy, but there is no hint that it is preparing to raise interest rates,” said Mr Sal Guatieri, economist at BMO Capital Markets.
Others said that the Fed is moving slowly to execute its declared exit strategy from a massive effort to jolt the US economy out of recession. “No rate hike should be expected at least through the first part of next year. But the Fed is remaining flexible,” said Mr Joel Naroff, at Naroff Economic Advisors. “The members are adjusting their outlook to the evolving economy and are starting to remove some of the crutches, such as the purchases of mortgage-backed securities.”
Mr Brian Wesbury, at First Trust Portfolios said that the removal of these emergency credit programmes marks the first step toward a rate hike. “The Fed made it clear that it was neither expanding the credit amounts in the facilities or time frame related to the facilities. Instead, it plans on winding them down as previously scheduled,” he said.
Mr John Silvia, economist at Wells Fargo, said the Fed is showing confidence in the economic recovery by allowing the extra programmes to run their course.