Fed statement: Cheerleading for the recession’s end

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Federal Reserve policymakers today sent a stronger signal that they believe the recession is ending.

In its post-meeting statement, the Fed took a more upbeat tone on the economy, saying that conditions appeared to be ‘leveling out.’

The June meeting statement, by contrast, had said that the ‘pace of economic contraction is slowing.’

The wording shift clearly is aimed at building confidence in a recovery. In the early stages of a rebound psychology is crucial: In effect, businesses and consumers have to talk themselves into feeling better.

The central bank also indicated that it would stop buying Treasury securities this fall, as expected, but that it would stretch its remaining purchases through October.

The $300-billion Treasury purchase plan, announced last winter, was aimed at trying to restrain long-term interest rates as the Treasury ramped up record borrowing to support the Obama administration’s economic-stimulus program.

But Treasury bond yields have risen anyway, largely because investors have shifted money away from government bonds and into riskier assets, like stocks, amid growing hopes for an economic recovery. Most Wall Street analysts expected the Fed to wind down the Treasury-purchase program and divert its resources elsewhere.

The Treasury market isn’t showing any significant reaction to the Fed’s announcement today. Yields are mostly up modestly.

Here is the text of the central bank’s statement:

Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year.

In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.

The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

-- Tom Petruno