Economic activity in US will still be stimulated by low bank lending rate

With numerous signs that the recession is finally ending and financial stresses easing, the Federal Reserve policymakers are certain to keep the target range for its bank lending rate between zero and 0.25 % at the end of their two-day meeting Wednesday in order to try to stimulate economic activity. 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 3.2%, the lowest rate in decades.

The government said Friday that employers cut only 247,000 jobs in July, the fewest in a year. Wages and workers' hours also nudged up, encouraging signs that companies no longer see the need for drastic cost-cutting. Although the unemployment rate dipped to 9.4 % in July, its first drop in 15 months, many, including people in the Obama administration and at the Fed, predict that it will start climbing again and it could still top 10 % this year. Thus, weak job market will limit wage growth. Companies aren't going to feel generous about wages and benefits until they are confident a recovery will last.

Besides, policymakers will probably pledge anew to keep rates there for "an extended period," which economists interpret to mean through the rest of the year and into part of 2010. By holding rates so low, the Fed hopes to induce consumers and businesses to boost spending, even though banks are still being stingy about extending credit.

Furthermore, Fed will consider whether some rescue programs should continue. One such program, aimed at driving down interest rates on mortgages and other consumer debt, involves buying U.S. Treasurys. The central bank is on track to buy $300 billion worth of Treasury bonds by the fall; it has bought $236 billion so far. Another program, the Term Asset-Backed Securities Loan Facility, or TALF, is intended to spark lending to consumers and small businesses. It got off to a slow start in March and is slated to shut down at the end of December. Despite this program, many people are still having trouble getting loans, analysts say.

The Fed isn't expected to launch any new revival efforts or change another existing program that aims to push down mortgage rates. In that venture, the Fed is on track to buy $1.25 trillion worth of securities issued by mortgage finance companies Fannie Mae and Freddie Mac by the end of the year. The central bank's recent purchases have averaged $542.8 billion.

The economy in the second quarter contracted at a pace of just 1 %, suggesting that the recession, is ending. That dip came after a dizzying free-fall in the first three months of this year. The economy had plunged at an annual rate of 6.4 % in the first quarter, the worst showing in nearly three decades. With the economy improving but still weak, inflation should stay low, the Fed says. Given consumers' caution, companies won't have much power to raise prices.