Federal Reserve Says Economy Is 'Leveling Out'

Federal Reserve Chairman Ben Bernanke.

Federal Reserve Chairman Ben Bernanke sees the economy stabilizing. Chip Somodevilla/Getty Images hide caption

toggle caption Chip Somodevilla/Getty Images

The Federal Reserve today announced that it will wind up its planned $300 billion program for buying government debt from financial institutions by the end of October, since the economy is "leveling out." The Fed has bought $253 billion worth of U.S. Treasury bonds from banks in an effort to get more money moving through the economy. If banks are holding cash instead of Treasurys, the thinking goes, they'll be more likely to lend to people and businesses.

The Fed also announced it will not be raising its key interest rate, the federal funds rate. This target rate is the amount the Federal Reserve hopes banks will charge for overnight loans to other banks. The decisions come after a two-day meeting by the Federal Open Market Committee, which sets monetary policy and works to carry it out.

The Federal Reserve lowered the rate on Dec. 16, 2008, by a range — of .75 to 1 percent — to a record-low of zero to .25 percent.

Since then the economy has begun to show signs of turning around. Unemployment dipped by .1 to 9.4 percent in July, exports are on the increase and gross domestic product was shrinking more slowly last quarter than the quarter before.

With such a low target rate, the Federal Reserve risks creating inflation when the economy gets going again. The Fed began buying Treasurys from banks to lower the interest rate and increase the supply of cash. The Fed has bought so many government bonds that it has tripled its assets to $2 trillion in the last year. Recently, the Federal Reserve Bank of New York has reportedly been doubling its staff of traders to help manage its ballooning portfolio.

If the economy does recover, demand will increase and producers may start raising prices; a surplus of cash could fuel an uncomfortable level of inflation. Some economists, including Allan Meltzer, have urged the Fed to raise the rate soon.

So far, wages and most prices have stayed relatively flat. Last month, Fed Chairman Ben Bernanke told Congress that he belives the rate will need to stay low for "an extended period. Bernanke added, "[W]e also believe that it is important to assure the public and the markets that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed, thereby avoiding the risk that policy stimulus could lead to a future rise in inflation."

Today's statement, by Bernanke and the other Federal Open Market Committee members, says the Fed "expects that inflation will remain subdued for some time."



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