JIM LEHRER: The Federal Reserve signaled confidence today in the economy’s ability to come back.
As expected, the central bank held a benchmark interest rate near zero, a record low. And in a statement, policymakers said, “Economic activity is leveling out.” They also said financial markets “have improved further” since their last meeting in June.
In response, the Dow Jones Industrial Average gained 120 points to close at 9,361 today. The Nasdaq rose nearly 29 points to close at 1,998.
Jeffrey Brown has more on our lead story.
JEFFREY BROWN: And for that, I’m joined by Washington Post business reporter Neil Irwin.
Well, Neil, that line Jim just quoted, “Economic activity is leveling out,” that’s Fed-speak for things are looking better, I guess. What are they seeing?
NEIL IRWIN, Washington Post: Well, they’re seeing the same things that private economists are seeing and ordinary Americans are seeing, which is, even though the economy is still in bad shape, we’re not seeing growth just yet probably, things are a lot better than they were six months ago.
And we seem to be in a bottoming process where the economy isn’t shrinking at the same pace it was. It probably isn’t shrinking at all anymore. And, you know, that doesn’t mean that we’re going to get a roaring recovery in the months ahead, but it is better than where we were. And they’re acknowledging that and explaining some of the reasons that seems to be happening.
JEFFREY BROWN: And at the same time, as you say, they do say that economic activity is likely to remain weak, I'm quoting, "economic activity is likely to remain weak for a time." So there is still plenty of caution.
NEIL IRWIN: There is. And, of course, you know, they're not proclaiming victory. The Fed is not saying, "It's all over. We can go back to the way things were, and the economy's in great shape."
They're leaving interest rates near zero, as you said. And, of course, they're saying they're going to leave them there for some time, and that's the signal that we don't think this is over yet, we're going to make sure and we're doing everything we can to try and support the economy and get us out of this sometime in the future.
JEFFREY BROWN: Now, even more than interest rates this time, observers were watching to see if the Fed would take action on some of those big programs they put in place last fall to help with the economic crisis, and they did take some action. Tell us what they did.
NEIL IRWIN: That's right. There was this program that was announced back in March to buy $300 billion of U.S. Treasury bonds, and that has been kind of controversial. You know, the idea was to lower interest rates to make it cheaper for companies that wish to expand or cheaper for people trying to buy a house, so the goal was to buy these bonds and thereby lower interest rates.
Some of the controversy has come about because it feels an awful lot to people like they're printing money to buy government debt, they're printing money to finance the budget deficit, so it became a very controversial program, even though it's a good bit smaller than some of the other initiatives that the Fed has undertaken.
What they said today is that that program is essentially going to go away, and they're going to do that $300 billion they announced, but not extend or expand that program after October. So it looks like finally one program has been taken out of the arsenal for the Federal Reserve right now.
Fed in a Balancing Stage
JEFFREY BROWN: At the same time, others continue, right? There was some conjecture that they might signal something about the so-called TALF, the Term Asset-Backed Securities Loan Facility, which helps with various consumer loans, but no action there. So they're clearly in a kind of balancing stage of figuring out where to take action and where to hold back.
NEIL IRWIN: That's right. They have a real tightrope to walk. If they move too quickly, if they take away these programs too fast, then it could cause, you know, the recession to worsen and maybe we don't have the recovery that we want. That's the mistake that the Japanese made in the 1990s.
On the other hand, if they wait too long and don't remove these programs quickly enough, we could have an inflation problem down the road. So it's a very difficult task, and that's what they're going to be spending a lot of time thinking about in the years ahead, as they figure out how to deal with the aftermath of all these expansive programs they created over the last year.
JEFFREY BROWN: You just mentioned inflation. I did note in the statement that it says inflation -- it predicts inflation will remain under control for some time. So they're looking out there, and they're not seeing it right now, at least.
NEIL IRWIN: That's right. You know, the unemployment rate is 9.4 percent. Our factories aren't operating anywhere near their capacity. All of that makes it hard in the view of the Fed leaders for prices really to rise at a dangerous rate.
And that's their view. They'll be monitoring it closely. But the view is that the real risk is that the recession continues and gets worse and we don't have much of a recovery. That is the predominant concern right now, not that there will be inflation in the near term.
Interest Rates to Remain Low
JEFFREY BROWN: And, lastly, let me just go back to interest rates. It's the thing we usually talk about at Fed meetings. Of course, now it stays where it is and it's the last thing we talk. But what did they signal today about how long they will keep rates this low?
NEIL IRWIN: It's clear they want to keep rates low for some time. What "some time" means is going to depend on the economy.
If we end up in an environment where growth resumes and gets strong next year, maybe by the end of the year, they could be raising rates. If this becomes a long slog, it could be much longer than that.
I think even if you gave Ben Bernanke truth serum, he wouldn't be able to tell you just now when they'll be raising rates again.
JEFFREY BROWN: All right. Neil Irwin of the Washington Post, thanks very much.
JIM LEHRER: We'll have more on the Federal Reserve later in the program tonight.