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WASHINGTON: The Federal Reserve on Wednesday extended its near-zero interest rate policy and said the ailing US economy is stabilising, but indicated it would scale back a massive effort to pump liquidity into the financial system.
Concluding a two-day monetary policy meeting, the Federal Open Market Committee (FOMC) said that "economic activity is levelling out" amid the deep recession.
"Conditions in financial markets have improved further in recent weeks," the panel said, announcing it would maintain the federal funds rate range of zero to 0.25 percent.
"Household spending has continued to show signs of stabilising but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit," the FOMC said after its unanimous decision.
"Although economic activity is likely to remain weak for a time, the committee continues to anticipate that policy actions to stabilise financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability."
As widely expected, the panel headed by Fed chairman Ben Bernanke said it "continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
But the central bank also said it would begin to pull away from a massive effort to pump liquidity into the financial system through the purchase of Treasury bonds and mortgage-backed securities.
The 300-billion-dollar Treasury bond programme will be completed by the end of October, the Fed said, extending the effort by one month.
"To promote a smooth transition in markets as these purchases of Treasury securities are completed, the committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October," it said.
The Fed's programme, sometimes known as quantitative easing, also involves the purchase of more than one trillion dollars of mortgage securities expected to be completed by the end of the year.
Analysts said the move was a first modest step toward pulling away from extraordinary support of the economy.
"The Fed is pulling back on one market support programme of buying Treasuries but it is easing out of it," said Robert Brusca at FAO Economics.
"The Fed is getting less worried but is not at a point to depend on recovery yet or to bet on how strong it will become."
Craig Alexander, deputy chief economist at TD Bank Financial, said the announcement suggested only a small improvement in the troubled financial system.
The slowing of Treasury purchases "is a reflection that the economic numbers are showing some improvement," Alexander said.
"But they are not going so far as saying the economy doesn't require" the extra support.
Alexander said that under the current circumstances, the Fed may keep its near-zero policy for as long as another year.
"I don't think there is an urgency to tighten policy anytime soon," he said.
"I don't believe economic growth is going to be strong in the coming quarters. There is an awful lot of slack in the economy."
Ryan Sweet at Moody's Economy.com said the Fed's decision to slow its Treasury purchases was "a somewhat surprising twist," but stopped short of a major shift.
"The Fed appears in no hurry to tighten monetary policy as the sustainability of the recovery is still debatable," Sweet said.
The Fed announcement came days after news that gross domestic product (GDP) - the broad measure of the economy's activity - fell at an annualised rate of 1.0 percent in the second quarter, after a 6.4 percent plunge in the January-March period.
Unemployment dipped unexpectedly in July to 9.4 percent, one-tenth point lower than the 26-year high hit in June. Although job losses narrowed to 247,000 from 443,000 in June, the labour market remained frail. - AFP/de
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