Fed shows a little optimism

Central bank says the long decline for the U.S. economy appears to have ended, although it's likely to remain weak for awhile.

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By Chris Isidore, CNNMoney.com senior writer

When do you think the economy will improve?
  • In the next few months
  • In six months to a year
  • In a year or more
  • It's already on the mend

NEW YORK (CNNMoney.com) -- The Federal Reserve said Wednesday it appears that the U.S. economy has halted the longest period of decline since the Great Depression, although it cautioned that economic activity is likely to remain weak in the near term.

The central bank left its key overnight interest rate at a 0% to 0.25% range, as expected. Its statement at the conclusion of its two-day meeting said "economic activity is leveling out."

That is the Fed's most bullish assessment of the economy in more than a year, and suggests that a recovery may have started.

It said it still expects "inflation will remain subdued for some time" and said that it expects rates to remain near zero percent "for an extended period."

The Fed cut interest rates to the record low range at its December meeting in an effort to spur the struggling U.S. economy at that time.

It also pumped about $1 trillion of cash into the economy during the last year through a number of extraordinary programs, including the purchase of Treasurys and mortgage-backed securities, as well as new programs to get banks and other lenders to extend credit to consumers.

The Fed statement said it believes those actions, along with the stimulus packages passed by Congress "will contribute to a gradual resumption of sustainable economic growth."

Change of tone: Economists said the Fed's statement represented a significant change from its recent pronouncements on the state of the economy.

"It think we are really seeing a paradigm shift in thinking at the central bank," Sung Won Sohn, an economics professor at Cal State University, Channel Islands. "They are no longer concerned about a severe economic contraction as they were last fall. They now want to nourish the budding economic recovery."

But Sohn and Rich Yamarone, director of economic research at Argus Research, said the Fed is unlikely to raise interest rates anytime in the foreseeable future, even if it starts to pull back on some of the other programs it used to pump money into the economy.

"Many of the Fed's emergency initiatives were rescue measures enacted for a sinking economy," said Yamarone. "Now that the economic recession has seemingly stabilized, the Fed can afford to pull in a few of its life rafts. But it's a safe bet the Fed finds comfort in keeping a few life preservers in the water until the coast is clear."

Robert Brusca of FAO Economics said that despite the change in tone in the statement, it's premature to say that the Fed sees the economy as definitely entering into a period of recovery.

"The Fed is getting less worried, but is not at a point to depend on a recovery yet or to bet on how strong it will become," he said.

The Fed said Wednesday it expects to complete the previously announced purchases of $300 billion of Treasurys by October, and that to have "a smooth transition in markets" it will slow those purchases between now and then.

In recent weeks, there has been a growing consensus among top economists that the U.S. economy has turned around or is close to doing so. A number of economic readings, including the government's employment report and the gross domestic product, the broadest measure of the nation's economic activity, have improved -- although they still show job losses and a modest drop in GDP.

The Fed has long been on record as saying it expected economic growth to return in the second half of 2009, although it expected a modest recovery at that time. The statement Wednesday is the most explicit declaration yet that recession that started in December 2007 has come to an end.

U.S. stocks sustained earlier gains Wednesday afternoon after the Fed's statement. Bond prices, which had been lower before the announcement, slipped further. Treasury rates, which move in the opposite directions, rose as the Fed detailed its plans on purchases.

Do you think the Fed is right that the economy has found a bottom? What do you think about the job the Fed has done trying to fix the economy? Share your thoughts below. To top of page

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