WASHINGTON - With the U.S. economy turning a corner, Federal Reserve policy-makers will consider whether some consumer lending programs intended to ease the recession and stem the financial crisis should be extended.
Fed chairman Ben Bernanke and his colleagues opened a two-day meeting Tuesday afternoon, where they will sift through economic data and anecdotal information about how businesses and consumers are faring nationwide. So far, many of those barometers suggest the worst recession since the Second World War is ending and that the economy has started to grow again, or will soon.
Still, the Fed has warned that recoveries after financial crises tend to be slow.
And there are risks lurking.
While unemployment dipped to 9.4 per cent in July, the Fed says it's likely to top 10 per cent this year because companies won't be in a rush to hire. That could restrain the recovery if it crimps spending by already-cautious consumers.
Another danger comes from the troubled commercial real market where defaults on loans are rising. That's a strain on banks holding such loans. The increasing risk is making lenders ever-more stingy about new commercial real-estate loans or refinancing existing ones.
Against that backdrop, the Fed is all but certain to hold a key bank lending rate at a record low near zero when its meeting ends Wednesday. The central bank also is expected to renew a pledge to hold that rate there for an "extended period."
Economists predict the Fed will leave its target range for its banking lending rate between zero and 0.25 per cent 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 per cent, the lowest in decades.
There have been signs the economy is on the mend.
Factory activity is improving. Home sales are starting to pick up, although much of the activity involves people snapping up bargain-priced foreclosed properties. Companies are cutting far fewer workers.
Some financial stresses also are easing, but lending is not flowing normally and financial markets aren't back to full throttle.
Many analysts believe the economy -which logged a mild contraction in the second quarter after a dizzying free-fall in the prior six months - is growing now. That makes it more likely the Fed will consider whether some rescue programs should continue, but any decisions might not come at this week's meeting.
One such program, aimed at driving down interest rates on mortgages and other consumer debt, involves buying U.S. Treasurys. The central bank is on track to buy $300 billion worth of Treasury bonds by the fall; it has bought $253 billion so far.
"I think they'll let it expire. It seems the mood turned against Treasury purchases in the last couple of months, and there's been some skepticism whether it has worked in bringing rates down," said Michael Feroli, an economist at JPMorgan Economics. There's also been some concern that the program makes the Fed look like it is printing money to pay for Uncle Sam's exploding budget deficits.
Federal Reserve, U.S. Treasurys, JPMorgan Economics
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