The Fed pledges use of all its tools

WASHINGTON (AP) — The Federal Reserve, acknowledging the economy has continued to deteriorate, signaled Wednesday that it will keep using unconventional tools to cushion the fallout, including keeping a key interest rate at a record low for quite “some time.”

Specifically, the Fed said it is “prepared” to buy longer-term Treasury securities if the circumstances warrant such action. At its December meeting, the Fed said it was merely evaluating that option. Such a move could help drive down mortgage rates and provide help to the stricken housing market, economists said.

The Fed also agreed — with one dissent — to keep the targeted range for the federal funds rate between zero and 0.25 percent. The funds rate is the interest banks charge one another on overnight loans. Economists predict the Fed will leave rates at that range through the rest of this year.

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, was the sole dissenter. He wanted the Fed to move forward on buying Treasury securities.

“The economy has weakened further,” the Fed said. To provide support, it said it would keep rates at rock-bottom levels for “some time.”

Having taken the unprecedented step of slashing its key rate to record lows at its previous meeting in December, the central bank pledged anew to look to other unconventional ways to revive the economy.

Fed Chairman Ben Bernanke and his colleagues are battling a three-headed economic monster: crises in housing, credit and financial markets that — taken together— haven’t been seen since the 1930s.

Despite the Fed’s aggressive rate-cutting campaign, a string of bold Fed programs and a $700 billion financial bailout program run by the Treasury Department, credit and financial markets are still stressed and far from normal. Yet, the Fed said there’s been some thawing of frozen credit conditions.

“Conditions in some financial markets have improved … nevertheless, credit conditions for households and firms remain extremely tight,” it said.

The Fed also said it stands ready to expand a program aimed at providing relief to the crippled mortgage market.

The central bank is buying up to $500 billion in mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. It also has agreed to buy up to $100 billion of Fannie and Freddie debt. Mortgage rates have fallen in the wake of the program’s announcement late last year. The Fed could buy more of these securities or extend the program.

The central bank also said it will launch a program aimed at bolstering the availability of consumer loans. Under the program, expected to start in February, up to $200 billion will be made available to spur auto, student and credit card loans as well as loans to small businesses. To do that, the Fed will buy securities backed by those types of consumer debt. It hopes that action will lower rates on those loans.

The Fed said it will assess whether the program should be expanded in size or scope. Officials previously mentioned the possibility of expanding the program to provide financing for other types of securities, such as those backed by commercial mortgages.

The central bank on Wednesday repeated its pledge to “employ all available tools” to turn the economy around. Since its last meeting in December, the Fed said the economy had lost even more traction.

“Industrial production, housing starts and employment have continued to decline steeply as consumers and businesses have cut back spending,” the Fed said. “Furthermore, global demands appears to be slowing significantly.”

Looking ahead, the Fed anticipates “a gradual recovery in economic activity will begin later this year,” but cautioned that “the downside risks to that outlook are significant.”

Warning that the nation is at a “perilous moment,” President Barack Obama made a fresh plea to Congress on Wednesday to enact an $825 billion package of increased government spending and tax cuts to stimulate the economy.

The recession, now in its second year, could turn out to be the longest since World War II.

The nation’s unemployment rate bolted to a 16-year high of 7.2 percent in December and could hit 10 percent or higher at the end of this year or early next year. A staggering 2.6 million jobs were lost last year, the most since 1945, though the labor force has grown significantly since then. An additional 2 million or more will vanish this year, economists predict.

Meanwhile, consumer prices have been falling. At first that seems like a blessing for shoppers, but it if spreads to wages and already stricken prices for homes, stocks and other things for a long time, it could wreak more havoc on the economy. The country’s last serious bout of “deflation” was in the 1930s. Holding rates at record lows would help fend off any deflation risks.