August 12, 2009 / 7:56 AM / 10 years ago

Fed seen holding rates steady, ending bond buys

WASHINGTON (Reuters) - The Federal Reserve is expected to end its buying program of long-term government securities at a meeting that concludes on Wednesday, but keep U.S. interest rates steady at near zero amid signs the economy is stabilizing from a deep recession.

Federal Reserve Chairman Ben Bernanke testifies before a House Financial services committee hearing on Regulatory Perspectives on the Obama Administration's Financial Regulatory Reform Proposals on Capitol Hill in Washington July 24, 2009. REUTERS/Yuri Gripas

The Fed’s policy statement is expected at 2:15 p.m. near the end of a two-day meeting. Policy-makers resumed their gathering at around 9 a.m. EDT, a Fed spokesperson said.

Policymakers will steer a careful course in acknowledging signs a turnaround may be near without triggering expectations that interest rate rises are imminent.

The Fed is instead expected to acknowledge encouraging signs — including moderating job losses in July — while reemphasizing that it expects any future growth to be sluggish and accompanied by persistently high unemployment.

“The Fed will acknowledge improvement in the economy and the probability of stronger-than-expected growth in the third quarter, but carefully outline downside risks to both growth and inflation,” said Joseph Brusuelas, an economist with Moody’s Economy.com in West Chester, Pennsylvania.

Adding to glimmers of hope, goods imports into the United States rose in June for the first time in 11 months, the Commerce Department reported on Wednesday.

The Fed is concerned joblessness and the removal of temporary factors down the road, such as the government’s “cash for clunkers” car trade-in program, pose risks to the fragile path to recovery.

Policymakers also want to lay the groundwork for removing the massive amounts of money they have pumped into the economy to put a floor under the worst recession in decades. They are expected to allow a program to buy $300 billion in longer-term Treasuries run out as scheduled in mid-September.

“They will send a clear signal ... that the need for the program, which they thought was strong six months ago, has clearly dissipated and they will continue to wind down the program,” said Paul Ballew, head of analysis for insurer and financial services firm Nationwide.

The Fed has shaved interest rates to a range of zero to 0.25 percent and pushed more than $1 trillion into financial markets after the dramatic bursting of the U.S. housing bubble and a subsequent spread of credit defaults pushed financial markets into crisis and sent the economy into a tailspin.

Many analysts worry that the Fed will not be able to raise rates and withdraw money from markets in time to prevent dangerous inflation from sparking, but policymakers argue they have sufficient tools to engineer an exit.

Editing by Neil Stempleman

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