Fed says economy leveling, new indicators are due

WASHINGTON — The Federal Reserve said the economy may be “leveling out” as it held interest rates at record lows, while the weekly jobless claims to be released Thursday may give another sign of whether the recession is nearing an end.

Meanwhile, retail sales are likely to show an improvement in consumer spending, helped by the Cash for Clunkers program. Economists, however, do not believe consumer spending will look as strong excluding auto sales.

The Fed delivered a vote of confidence in the economy Wednesday, saying it would slow the pace of an emergency rescue program to buy $300 billion worth of Treasury securities and shut it down at the end of October, a month later than previously scheduled.

It also held interest rates steady, with a closely watched bank lending rate near zero, and again pledged to keep them there for “an extended period” to nurture an anticipated recovery.

Fed Chairman Ben Bernanke and his colleagues said the economy appeared to be “leveling out” — a considerable upgrade from their last meeting in June, when the Fed observed only that the economy’s contraction was slowing.

“We’re no longer at DEFCON 1,” said Richard Yamarone, economist at Argus Research, referring to the defense term used to indicate being under siege. “The Fed is pulling in some of its life preservers now that the economy is no longer sinking.”

The more optimistic tone lifted Wall Street on Wednesday. The Dow Jones industrials gained about 120 points, or 1.3 percent, to close above 9,360 — near their highest level since the market bottomed out in early March. Ahead of the opening bell Thursday morning, Dow Jones industrial average futures rose 96, or 1 percent, to 9,415.

The Treasury-buying program has bought $253 billion of the securities so far. The program is designed to force interest rates down for mortgages and other consumer debt and spur Americans to spend more money.

The program’s effectiveness has been questioned on both Wall Street and Capitol Hill, with critics saying it looks like the Fed is printing money to pay for Uncle Sam’s spending binge.

As the Fed winds down the program, rates on government debt might edge higher, economists said. But the Fed appeared to feel sufficiently secure that higher rates would not jeopardize a recovery, they said.

Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi, viewed it as a “vote of confidence that credit markets and the economic outlook has improved and will show even further improvement down the road.”

The Fed left the target range for its bank lending rate at zero to 0.25 percent. And economists think it will stay there through the rest of this year. The rationale: Super-cheap lending will lead Americans to spend more, which will support the economy.

Reports last week from the nation’s major chain stores indicated that shoppers remained tightfisted in July as households struggle with continued job layoffs and the nation’s longest recession since World War II.

Retail sales are considered a strong indicator of economic recovery because consumer spending accounts for more than two-thirds of all economic activity. It is widely believed spending needs to improve to help end the ongoing recession.

A big concern now is whether worried consumers will cut back on their back-to-school purchases in coming weeks and their holiday shopping later this year.

Economists surveyed by Thomson Reuters expect retail sales rose 0.7 percent last month after a 0.6 percent increase in June. However, the consensus view is that retail sales, excluding autos, will show a modest 0.1 percent increase, weaker than the 0.3 percent gain in June.

The Cash for Clunkers program, which gives people trading in certain types of vehicles up to $4,500 if they increase their mileage by at least 5-10 mpg, has proven popular, helping to boost unit sales of light vehicles in July to the highest level since last September.

Further job losses, sluggish income growth, hits to wealth from tanking home values and still-hard-to-get credit could make Americans cautious in the months ahead, the Fed said.

While unemployment dipped to 9.4 percent in July, the Fed says it’s likely to top 10 percent this year because companies are in no rush to hire.

Wall Street economists expect the number of newly laid-off workers filing applications for unemployment benefits fell slightly last week as companies cut fewer jobs.

A Labor Department report is projected to show new unemployment insurance claims fell to a seasonally adjusted 545,000 from 550,000, according to economists surveyed by Thomson Reuters.

Both the unemployment and retail sales reports are due out Thursday at 8:30 a.m. EDT.