17 March 2009

[US] Fed to mull ways to lift country out of recession

The following is excerpted from today's "Business Week".

Federal Reserve policymakers gather to examine ways to lift the country out of financial and economic turmoil as Americans fume over the government's handling of AIG's bailout.

Fed Chairman Ben Bernanke and his colleagues open a two-day meeting Tuesday afternoon, where they also will take fresh stock of financial and economic conditions. They are all but certain to leave a key bank lending rate at a record low to try to brace the economy, which has been stuck in a recession since December 2007...

What has really touched a public nerve: The fact that American International Group Inc. -- bailed at four times by the U.S. government to the tune of more than $170 billion -- paid $165 million in bonuses to employees who worked in a division that has been blamed for the insurance company's near collapse last year. The bonuses came even as the company reported a stunning $62 billion loss, the biggest in U.S. corporate history.

Fury expressed by the public as well as Democrats and Republicans on Capitol Hill over the AIG case could make it politically harder for the Obama administration and the Fed to sell new financial rescue efforts.

Stabilizing the nation's financial system is key to turning around the economy, Bernanke has repeatedly said. If that can be done, then the recession might end this year, setting the stage for a recovery next year, he said.

Even in this best-case scenario, though, the nation's unemployment rate now at quarter-century peak of 8.1 percent will keep climbing. Some economists think it will hit 10 percent by the end of this year.

To help provide some relief, the Fed is widely expected to hold the targeted range for its key bank lending rate between zero and 0.25 percent when the meeting concludes Wednesday. Economists predict the Fed will leave this rate at record low levels through the rest of this year.

The hope is that rock-bottom borrowing costs will spur consumers and businesses to step up spending, which would aid the economy. So far, however, still-tight credit, rising unemployment and other negative forces have forced Americans to retrench.

It's less clear whether the Fed will unveil new actions to battle the worst financial crisis since the 1930s.

One option advanced at its last meeting in January is buying long-term Treasury securities. Doing so would help further drive down mortgage rates and help the crippled housing market, economists said.

Another option put forward in January is expanding a Fed program aimed at bolstering the mortgage market. The Fed could boost its purchases of debt issued or guaranteed by mortgage giants Fannie Mae and Freddie Mac. Since that program was announced late last year, mortgage rates have fallen.