Fed Likely To Leave Rates At Lows To Aid Recovery

Published on: Wed, Aug 12, 2009

Classified as: Banks, Interest Rates, Loans, News

There are eminent signs that the economic recovery may finally be taking shape, but with dangers still hanging about, Federal Reserve policymakers are making sure to leave a key interest rate at a record low rate to make sure any emerging turnaround gains traction.

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It is being anticipated that the worst recession since World War II is ending, and that the economy has started to grow again, or will soon. And with the economy turning a corner, the Fed also will weigh whether consumer lending programs intended to ease the recession and stem the financial crisis should be extended.

But still, the Fed has warned that recoveries after financial crises tend to be slow and the dangers remain. According to Fed, while unemployment dipped to 9.4 percent in July, it’s likely to top 10 percent this year because companies won’t be in a rush to hire. That could become a hurdle in the recovery process.

The troubled commercial real market offers another risk where defaults on loans are rising. The banks are straining to hold such loans. The increasing risk is making lenders extremely stingy about handing out new commercial real-estate loans or refinancing existing ones.

Economists predict that the Fed will leave its target range for its banking lending rate between zero and 0.25 percent through the rest of this year. This super-low lending rate will encourage the Americans to spend more, which would support the economy.

If the Fed holds its key rate steady, 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 3.25 percent, the lowest in decades.

There have been evident signs that the economy is on the mend. Factory activity is improving, home sales are starting to pick up, and companies are cutting far fewer workers. That makes it more likely the Fed will consider whether some rescue programs should continue, but any decisions might not come at this week’s meeting.

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