Fed gathers to take U.S. economy's pulse

ByABC News
August 11, 2009, 7:33 PM

WASHINGTON -- With the U.S. economy turning a corner, Federal Reserve policymakers will consider whether some programs intended to ease the recession and stem the financial crisis should be extended.

Fed Chairman Ben Bernanke and his colleagues open a two-day meeting Tuesday afternoon, where they will sift through economic data and anecdotal information about how businesses and consumers are faring nationwide. So far, many of those barometers suggest the worst recession since World War II is ending and that the economy has started to grow again, or will soon.

Still, the Fed has warned that recoveries after financial crises tend to be slow.

And there are risks lurking.

While unemployment dipped to 9.4% in July, the Fed says it's likely to top 10% this year because companies won't be in a rush to hire. That could restrain the recovery if it crimps spending by already-cautious consumers.

Another danger comes from the troubled commercial real market where defaults on loans are rising. That's a strain on banks holding such loans. The increasing risk is making lenders ever-more stingy about new commercial real-estate loans or refinancing existing ones.

Against that backdrop, the Fed is all but certain to hold a key bank lending rate at a record low near zero when its meeting ends Wednesday. The central bank is also expected to renew a pledge to hold that rate there for an "extended period."

Economists predict the Fed will leave its target range for its banking lending rate at zero to 0.25% through the rest of this year. The rationale: Super-low lending will spur Americans to spend more, which would support the economy.

If the Fed holds its key rate steady, that means commercial banks' prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will stay around 3.25%, the lowest in decades.

There have been signs the economy is on the mend.

Factory activity is improving. Home sales are starting to pick up, although much of the activity involves people snapping up bargain-priced foreclosed properties. Companies are cutting far fewer workers.