Fed says downturn has slowed, but economy still weak
— -- The Federal Reserve on Wednesday confirmed that the nerve-wracking economic free fall of recent months slowed in the past month. But the economy continues to shrink and will remain "weak" for some time, the nation's central bank said.
The policymaking Federal Open Market Committee voted to leave its benchmark interest rate unchanged at near zero and reiterated plans to buy up to $1.75 trillion in government securities in a bid to ease tight credit markets. Its decision to stand pat followed an extended blizzard of crisis-fighting steps.
"I don't see it as terribly optimistic. ... It doesn't suggest we're at the bottom," said William Poole, until last year president of the Federal Reserve Bank of St. Louis and a member of the FOMC.
But investors were cheered by the Fed statement, which they interpreted as a sign that the recession's fury may be easing. The Dow Jones Industrial Average closed at 8185.73, up 168.78 points.
"They took very, very aggressive actions at their last meeting. It seems they're happy with what the initial results are," says Greg Salvaggio, senior vice president for capital markets at Tempus Consulting in Washington, D.C.
Still, the economy is far from out of the woods. The Fed's announcement came shortly after the government said that gross domestic product for the first quarter fell at a seasonally adjusted annual rate of 6.1%.
The sharp decline, along with the 6.3% drop in the preceding quarter, was the economy's worst six-month record since the Eisenhower administration.
"Business is hunkered down. They're chopping inventories. They're really trying to get on top of this bucking bronco," says economist Brian Bethune at IHS Global Insight.
In the past year, the Fed has slashed interest rates to near zero and introduced other measures in a bid to clear blocked credit channels. Last month, it announced plans to buy up to $1.25 trillion in mortgage-backed securities issued by Fannie Mae and Freddie Mac, an additional $200 billion in their debt and $300 billion in Treasury securities.
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