Fed Stands Pat, Hints Worst Over

Gradual Upturn Anticipated By Policymaking Body

April 30, 2009|By MarketWatch

WASHINGTON -The Federal Reserve suggested Wednesday that the worst of the recession may finally be over and, as a result, policymakers did not make any changes to their monetary policy stance.

The central bank's Federal Open Market Committee said that spending has stabilized and that the pace of the downturn appeared to be somewhat slower. The economy could remain weak in coming months, but policy actions and "market forces" were aligned to create a gradual upturn, the statement said.

Fed watchers saw little drama in Wednesday's announcement.

"The only major difference between today's statement and the previous one on March 18 is that today's cited the fact that most evidence points to a slowing rate of economic decline. Anyone with two eyes and a brain knows this to be the case," wrote Josh Shapiro, chief U.S. economist at MFR Inc. in a note to clients.

Economists had expected the policy-setting panel to maintain the status quo. The FOMC kept its target interest rate unchanged at an ultra-low zero percent-to-0.25 percent range.

In a report Wednesday, the Commerce Department said the U.S. economy contracted violently again in the first quarter of the year as business investment declined at a record rate.

Real gross domestic product - the inflation-adjusted, seasonally adjusted value of all goods and services produced in the United States - fell at a 6.1 percent annualized rate in the first quarter, nearly matching the 6.3 percent decline in the fourth quarter of 2008.

Despite the disastrous results, many economists said the report hinted that the worst of the declines may be over. The data on investment "have a capitulatory feel to them," said Stephen Stanley, chief economist for RBS Securities.

The economy has fared dismally over the past six months - collapsing by the sharpest rate in more than 50 years. The unemployment rate has spiked and business investment has slowed.

But the Fed is looking ahead, and the decision to stand pat is a sign policymakers believe that the worst may now be behind the country. That was assurance enough for the stock market. Major indexes showed gains of more than 2 percent. Private-sector forecasters agree that conditions are improving. They expect the downturn to moderate to a 2 percent annual pace of decline in growth in the April-June period after falling at more than 6 percent rate in each of the past two quarters.

The Blue Chip survey of economists sees a small positive growth rate in the third quarter and a stronger economy by the end of the year.

However, in part because the recession is global, many experts believe that the "green shoots" seen in the data may not survive the harsh global environment.

The Fed has taken extraordinary measures to combat the recession. It has pushed short-term interest rates to zero and launched an unprecedented effort to keep credit flowing around the economy.

Fed officials made no changes to their plans to buy Treasurys and other securities to support the flow of credit to the economy.

In March, the Fed promised to purchase $300 billion of Treasury securities, $200 billion of agency debt, and $381 billion of mortgage-backed securities.

Some bond market participants had suggested the Fed might promise to buy more Treasury securities. A few said the Fed would have to do so because yields on the 10-year note were moving up toward the 3 percent threshold.

Ironically, in the wake of the Fed's statement, yields did move above the 3 percent threshold.

"They are saving their bullets," wrote Dan Greenhaus, equity analyst at Miller Tabak.

The Fed has said that it is willing to keep pumping credit until the private market is prepared to take over the task.

The vote on the latest FOMC policy statement was unanimous.

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