Optimistic Fed slows support for housing market

WASHINGTON -- The Federal Reserve provided its most upbeat assessment yet of the economy on Wednesday, suggesting the recession is over and growth could be more robust than it previously anticipated.

But noting the economy is still relatively weak, the central bank agreed to keep a key interest rate unchanged near zero and extended its financial support for the housing market until the end of the first quarter.

At the same time, by slowing its purchases of $1.45 trillion in mortgage-related securities, the Fed is showing increased confidence in recovering lending markets, said Bruce McCain, chief investment strategist with Key Private Bank.

"Economic activity has picked up following its severe downturn," the central bank said in a statement following its two-day meeting.

Translation?

"The downturn is over," says Allen Sinai, chief economist of Decision Economics. That echoes Fed Chairman Ben Bernanke's remarks last week that the recession is likely history.

The housing market is picking up and household spending is stabilizing, the Fed said.

At the same time, the Fed said, consumer spending is "constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit."

The Fed had planned to complete purchases of up to $1.25 trillion of mortgage-backed securities and another $200 billion in mortgage-related debt by year's end. The initiative has lowered mortgage rates for home buyers. On Wednesday, however, the central bank said it would buy "a total of $1.25 trillion" rather than "up to" that sum.

"I think that's very significant" because it shows the Fed believes mortgage markets still need government support, economist Conrad DeQuadros of RDQ Economics

DeQuadros says extension of the program is largely designed to ensure a smoother transition to more robust private funding. An abrupt withdrawal of the initiative could raise mortgage rates.

Rates for home loans should remain low "in the 5% range" as long as the purchases continue, said Guy Cecala, publisher of Inside Mortgage Finance.