Fed Holds Interest Rate Steady At Record Low
MADELEINE BRAND, host:
Interest rates are at historically low levels and they'll stay that way for now. The Federal Reserve today decided to take no action on interest rates. Fed policymakers also say the economy is showing some positive signs. They made those announcements in a statement at the end of their two-day meeting today.
NPR's Jim Zarroli reports.
JIM ZARROLI: The statement said there are still plenty of danger spots in the economy, like job losses, sluggish income growth and falling home prices. And it said there still is no sign of inflation, which means the interest rates controlled by the Fed can stay low. But it said there are also more and more signs that the economy is stabilizing. Conditions in the financial markets have improved and businesses are pairing down their inventories. Scott Anderson is chief economist at Wells Fargo.
Mr. SCOTT ANDERSON (Chief Economist, Wells Fargo): Take the auto sector, for example, you had a huge decline in auto inventories and it was, you know, this Cash for Clunkers program, it's certainly boosted sales over the last month and that's leading to some shortages in some models.
ZARROLI: And Anderson says this is a good thing for the manufacturing sector because once companies sell off their unsold goods, they'll have to increase production again and that means they'll need to hire. The Fed also said that by the end of October, it would wrap up a program of buying up Treasury bills. The program was part of an effort by the Fed to keep interest rates low. It was one of a number of emergency programs started by the Fed last spring in an effort to stem the financial crisis and encourage banks to start lending again.
As a result of these programs, the Fed has amassed a huge amount debt on its balance sheet. But Anderson says the Fed has begun to pull back on some of these programs and is no longer pouring as much money in to them as it was.
Mr. ANDERSON: We've been looking at the Fed's balance sheet very closely. And one thing that's been happening behind the radar is the Fed's really already embarking on its exit strategy. It's already well underway without the Fed even having to lift a finger.
ZARROLI: The Fed can pull back in large part because the banking sector has grown a lot calmer, says Brian Bethune, chief U.S. financial economist at IHS Global Insight.
Mr. BRIAN BETHUNE (Chief U.S. Financial Economist, IHS Global Insight): When there was a liquidity crisis and banks were not able to fund themselves effectively, that's when the liquidity programs were needed. That is no longer the case, so the Fed is phasing out those programs and that make sense.
ZARROLI: Bethune says the Fed is still pumping a lot of money into mortgage-backed securities, largely because the housing market remains so weak, and the level of debt on its balance sheet is still large, which economists say can spell trouble for the economy in the long run. But the crisis has grown more contained and the troubles in the banking sector have eased considerably. Fed officials say that's a sign things have stabilized even if the economy remains troubled.
Jim Zarroli, NPR News, New York.