By Craig Torres
Jan. 28 (Bloomberg) -- The Federal Reserve panel in charge of interest rates declared for the first time the U.S. economy is in “recovery” and took several steps to prepare investors for the removal of aggressive monetary stimulus.
The Federal Open Market Committee yesterday upgraded its economic outlook, reaffirmed it will end liquidity backstops and a $1.25 trillion program to buy mortgage-backed securities and expressed less confidence inflation will remain “subdued.”
“This is as close an admission that we are likely to see that the FOMC thinks the recession is over and the economy is on a self-sustaining recovery path,” said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Policy makers need to think seriously on how they are going to reset the message on the low rates policy.”
Central bankers repeated their pledge to keep the benchmark lending rate in a range of zero to 0.25 percent for “an extended period,” while noting the economy “continued to strengthen.” Kansas City Federal Reserve Bank President Thomas Hoenig dissented, favoring a quicker adjustment to the rate outlook message.
Hoenig “believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted,” the FOMC said in yesterday’s statement.
Inflation “is likely to be subdued for some time,” policy makers said. Last month, the panel said inflation “will remain subdued.”
‘More Comfortable’
“They are starting to get more comfortable with the sustainability of the recovery,” said Stephen Stanley, chief economist at RBS Securities Inc. in Stamford, Connecticut. “The downside risks that they were so worried about are probably still there but diminishing in importance.”
Policy makers are winding down the record amounts of credit they have provided since the bankruptcy of Lehman Brothers Holdings Inc. in 2008.
The Fed also repeated that it will close four programs supporting money markets and bond dealers in February, as well as dollar swap programs with central banks in Europe and Asia.
The central bank is “prepared to modify these plans if necessary to support financial stability and economic growth,” the statement said. The Fed also said it is winding down the Term Auction Facility and will hold a final auction on March 8.
Confirmation Vote
Chairman Ben S. Bernanke, who faces a procedural vote in the Senate on his confirmation for a second term today, is looking for signs that the return to economic growth is accompanied by the prospect of stronger hiring and an increase in credit to people and businesses.
The Senate plans to vote on limiting debate and preventing lawmakers from blocking a vote on Bernanke’s nomination. As of yesterday, 50 senators said they would vote for or were inclined to support Bernanke, while 22 were opposed, according to a tally by Bloomberg News.
The U.S. unemployment rate held at 10 percent in December, while consumer credit dropped a record $17.5 billion in November.
“Household spending is expanding at a moderate rate, but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit,” the Fed said in its statement.
Employers “remain reluctant to add to payrolls,” and bank lending “continues to contract,” the FOMC said.
Verizon Communications Inc., coping with subscriber losses at its fixed-line phone business, said this week it will cut about 13,000 jobs at the division this year. Home Depot Inc., the world’s largest home-improvement retailer, said it will pare 1,000 U.S. jobs.
Consumer Wealth
Stocks have provided no increase in consumer wealth this year. The Standard & Poor’s 500 Index has declined 1.6 percent, and the Nasdaq Composite Index has lost more than 2 percent. Last year, the indexes rose 23.5 percent and 44 percent, respectively.
Officials kept have their benchmark overnight lending rate between banks in a range of zero to 0.25 percent for more than a year. Policy makers said that the “extended period” pledge is contingent on “low rates of resource utilization, subdued inflation trends, and stable inflation expectations.”
Production in the U.S. rose for a sixth consecutive month in December, and housing markets are stabilizing. Industrial production rose 0.6 percent last month, pushing up factory capacity in use to 72 percent. That’s still below the average plant-use rate of 78.5 percent from 2000 through 2007.
The economy expanded at a 4.6 percent annual rate in the final quarter of last year, according to the median estimate of economists surveyed by Bloomberg News. The government will release its advance report on gross domestic product tomorrow.
“The Fed can tolerate 3 to 4 percent growth for a couple of quarters,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “It would be a ticklish situation if the inflation numbers ticked up.”
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