Lisa Simpson
Sep 1,2009
In: Finance

Central Bank is Hesitating to Say that Recovery Has Replaced Recession

Many economic experts think that the recession is drawing to a close but the Central Bank is hesitating to say that recovery has replaced recession. The Federal Reserve is not prepared to lend their voices to the talk going all round about the end of recession.

Mark Zandi of Moody’s Economy said, “I think we’re arriving at the turn. I think we’ll reach it this month, maybe September, but we’ll look back and say this is the quarter the recession ended.”

But the many Fed observers feel that at the conclusion of their meeting that had continued for two days the Central Bank is likely to use general language about expectations regarding a modest growth that will take place during the second half of 2009. This means the policy makers will not change the interest rate from remaining at nearly zero. It is also not likely they will provide further details about when to begin pulling back the approximately $1 trillion extension of the balance sheet of the central bank.

David Wyss of Standard & Poor said, “I think they’re going to be a little more optimistic, but not get too carried away by it. These are central bankers and they tend to be pessimistic by nature.”

Kevin Giddis of Morgan Keegan spoke more or less along the same lines when he said, “You pull stimulus back when you see all four wheels rolling at the same time. We still have something of a traction problem. For the Fed to declare ‘game over’ is way premature.”

Other pundits of the economy opine that there have been many good signs like slowing down of the pace of job losses, increases in house prices etc. But the Feds cannot be too upbeat and optimistic because of other related problems. The investors would take it as a signal that higher rates are about to be introduced. This rumour could cause rates in the Treasury to increase and set about a round of inflation.

Lyle Gramley, a former governor of the Federal Reserve said, “That would slow the recovery, not accelerate it. They have to acknowledge it’s doing better and turned the corner.” Hence this accounts for their expectation is for a modest revival.

The expansion programme of $1 trillion by the Feds has resulted in the taking of some unusual steps – purchasing mortgage backed securities and the toxic debts of Fannie Mae and Freddie Mac. The Federal Reserve extended help to not only the banks but to firms of Wall Street.