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Fed Offers Vote of Confidence


Rates left unchanged after Open Market meeting.

Economic growth will be higher than anticipated in the second half of the year and interest rates will be kept low in an effort to sustain the recovery, the Federal Open Market Committee's action Wednesday afternoon suggests.

The Fed left the benchmark interest rate between 0 and 0.25%. It said stabilizing economic conditions mean the rate will remain "exceptionally low" for an "extended period."

Analysts expect growth of 2% or more in the remainder of the year, or twice the rate the Federal Reserve forecast in June. A reviving economy will boost the dollar.

"Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out," the Federal Open Market Committee said Wednesday in a prepared statement.

The bet: the Fed believes keeping interest rates low will sustain the economic recovery without sparking inflation. Wednesday's action by the Fed suggests interest rates will be kept low for the foreseeable future.

Keeping the key rate steady means the prime lending rate charged by banks, used to set rates on home loans, other consumer loans, and some credit cards, will remain at about 3.25%, or the lowest in years. (Take a look at the charts of BAC, C, AXP, COF, or JPM for more). But it's bad news for savers, especially the retired, who will continue to earn anemic returns on their Certificates of Deposit and money market funds.

Fewer jobs were lost in July than anticipated and the unemployment rate dipped to 9.4% from 9.5%, suggesting that the deepest recession since the 1930s may be easing. Nevertheless, many analysts expect unemployment to climb above 10% this year because employers remain cautious and aren't in a rush to hire despite some encouraging economic signs.

But the optimism may be short-lived. Rising unemployment may force consumers to sit on their money, posing a significant problem since consumer spending represents about two-thirds of the economy.

The Federal Reserve also announced plans to slow the pace of its $300 billion plan to buy US Treasuries and said it expects to complete purchase of the full amount by October.

"To promote a smooth transition in markets as these purchases of Treasury securities are completed, the committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October," the Federal Open Market Committee said in a prepared statement following a two-day meeting in Washington.
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