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Fed Starts Two-Day Meeting, Rates Seen Steady

Tuesday, 17 March 2009 07:18 AM

WASHINGTON -- Deprived of its main weapon to revive economic activity, the Federal Reserve meets Tuesday to consider new tools to open up credit markets and tackle the worst crisis since the 1930s.

At a two-day policy meeting opening Tuesday, the Federal Open Market Committee (FOMC) is expected to leave unchanged its base lending rates at zero to 0.25 percent as it mulls further moves to tackle the credit crunch and economic slump.

With the traditional tool of interest rate policy now exhausted, the central bank is focused on extraordinary efforts to pump up credit to boost the economy.

It has already started buying up mortgage securities and corporate commercial paper, and is set to launch a new program to pump 200 billion dollars into consumer credit through the purchase of securities linked to auto, student and other types of loans.

Fed chairman Ben Bernanke calls this "credit easing," saying it is aimed at stimulating borrowing and thus different from "quantitative easing" used in the 1990s in Japan and now mulled by other central banks.

In his first television interview since becoming Fed chairman in 2006, Bernanke predicted Sunday that America's worst recession in decades would likely end this year before a recovery gathers steam next year.

The "green shoots" of economic revival are already evident, Bernanke told CBS program "60 Minutes" in the interview.

Predicting that no more big banks will fail, Bernanke also called on Washington's squabbling politicians to show the will needed for recovery, arguing the world came "very close" to financial meltdown last September before government intervention.

The US central bank chief, whose decision to be interviewed on television underscored the gravity of the crisis, said much depends on fixing the banking system.

"We're working on it. And I do think that we will get it stabilized, and we'll see the recession coming to an end probably this year," Bernanke said.

"We'll see recovery beginning next year. And it will pick up steam over time."

Fed members "will do whatever is necessary to get the economy going, they will continue to drive that message home," said Julia Coronado, economist at Barclays Capital.

Coronado said she expects little change from the last FOMC statement in January, despite some tentative signs of stabilization in American consumer spending and other indicators.

"I don't think they will want to sound too optimistic," she said.

"They are taking all of these extraordinary actions because the risks to the economy are elevated. They try to call it as they see it and now the risks to the economy are to the downside."

The economist said she expects the Fed to keep open the option of buying long-term US Treasury bonds — which some analysts say would be an example of quantitative easing — if needed to help bring down overall borrowing costs.

"I don't think whether they call it credit or quantitative easing makes much difference," she said.

"If they decide to buy Treasuries, they will do it because they think it's the most effective way to lower borrowing costs for consumers and businesses."

Scott Brown, chief economist at Raymond James & Associates, said Fed members will carefully assess the tone of their message, in an effort to avoid sounding too negative.

"There has been some discussion about the negative impressions (by officials) about the economy and whether that tends to make things even worse," Brown said.

"I think there may be a little more 'happy talk,' not necessarily at this meeting, but possibly in the future," he said.

Some analysts say the Fed cannot let down its guard and needs to be even more aggressive to lift up an economy on the brink of depression.

"While much has been done, we believe policymakers still need to do more," said Bob Doll, global chief investment officer at BlackRock.

"In particular, we do not believe current monetary policy is stimulative enough to offset the credit market freeze. The Fed has slackened in its quantitative stimulus measures and has recently allowed its balance sheet to shrink, a move we believe is a mistake."

He also said the Fed must work with Treasury, saying "more aggressive action is needed in terms of removing toxic assets from bank balance sheets."

An announcement by the FOMC is expected around 1815 GMT Wednesday.

© 2009 Agence France Presse. All rights reserved.


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WASHINGTON -- Deprived of its main weapon to revive economic activity, the Federal Reserve meets Tuesday to consider new tools to open up credit markets and tackle the worst crisis since the 1930s.At a two-day policy meeting opening Tuesday, the Federal Open Market...
Tuesday, 17 March 2009 07:18 AM
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