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Fed Sees Recovering Economy

Policymakers not concerned about inflation -- yet

By Mark Huffman
ConsumerAffairs.com

September 24, 2009

For consumers who can still get loans, that likely means lower interest rates for the foreseeable future.

“Economic activity has picked up following its severe downturn,” the policymakers said in a statement. The statement said all signs seemed to be pointing to recovery, with improving financial markets, a rebounding housing market and stabilizing consumer spending.

Of the three signs, the financial markets appear to be in the best shape. The Dow Jones Industrial Average is within striking distance of 10,000 and not far from it's pre-plunge level of last year. The Dow bottomed in early March of this year, at around 6600. Many stock portfolios and 401(k) plans, decimated by last year's stock market crash, have recovered much of their losses.

Sluggish housing

Housing, meanwhile, remains somewhat sluggish although is showing signs of a pulse. However, much of the recent uptick in sales has been driven by foreclosures, which have driven home prices down to 2003 levels.

Consumers, meanwhile, are still spending but are showing a new sensitivity to price, and seem to be seeking out bargains. Discount retailers like Wal-Mart are doing better while many high end retailers continue to suffer.

Even though the Fed and Congress are spending trillions of dollars to pump up the economy, the Fed statement said inflation is not an immediate concern. It says the economy, while recovering, will do so at a slow pace with significant unemployment – factors it says will keep the breaks of rising prices.

High unemployment

August's unemployment rate was 9.7 percent, the highest level since the early 1980s. Some economists think it could reach 10 percent before it starts to fall.

Wall Street's initial reaction to the Fed statement was positive, with stocks shooting higher in afternoon trading. But some market analysts are asking when the Fed plans to start exiting its bail-out strategy, and address the vast amounts of money it has pumped into the system.

The dollar continues to fall as foreign countries, particularly China, grow leery of U.S. spending. A weak dollar will make imported goods – including oil – more expensive. While weak demand has kept gasoline prices stable in recent months, further weakness in the dollars could begin to cause consumers some pain when the next summer driving season rolls aroumd.

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