Fed policymakers likely to maintain aid programs

WASHINGTON (AP) — With the economy starting to rebound but still fragile, Federal Reserve policymakers this week are expected to keep emergency programs to encourage spending and borrowing intact. But to avoid unleashing inflation later on, they are likely to consider ways to rein in programs designed to keep mortgage rates down and get banks to lend more freely.

As the economy improves, the Fed will face more pressure to wind down some of its programs. For now, Fed Chairman Ben Bernanke and his colleagues probably will stay the course while striking a more optimistic tone at a two-day meeting that ends Wednesday.

“I think they are feeling more confident about the recovery,” said Christopher Rupkey, economist at Bank of Tokyo-Mitsubishi.

Fed policymakers are all but sure to keep interest rates at a record low near zero to nurture a tentative recovery. And they will probably stick with their goal of buying $1.45 trillion in mortgage-backed securities and debt issued by Fannie Mae and Freddie Mac by year’s end. The program is intended to lower rates on home mortgages and support the housing market.

The real-estate industry, which led the country into its worst recession since the 1930s, is starting to heal. Sales are firming. And prices in some markets are edging up after a dizzying plunge.

Still, the housing market is being propped up by the Fed’s programs, and its health remains precarious. Foreclosures are expected to keep climbing. Soured loans will still weigh on banks. More homeowners are expected to go under water, meaning they owe their lender more than their home is worth.

The Fed’s efforts have helped lower mortgage rates. Rates on 30-year loans dipped to 5.04 percent, Freddie Mac reported last week. That was down from 5.07 percent the previous week and 5.78 percent a year earlier.

Given the delicate state of the housing market, Fed policymakers will be loath to make any major changes, economists said.

Still, some analysts think the Fed could opt to slow its purchases. It could buy less than the full $1.45 trillion by year’s end. At the Fed’s previous meeting in August, some Fed officials said a “tapering” of the mortgage-buying program “could be helpful,” according to minutes of the private deliberations.

At that meeting, policymakers said they would gradually slow the pace of a program to buy $300 billion in Treasury securities and shut it down at the end of October, a month later than previously scheduled. That program is designed to force rates down for mortgages and other consumer debt to get Americans to spend more.

Most economists think the Fed will keep the target range for its bank lending rate at zero to 0.25 percent through the rest of the year.