The U.S. economy looks poised for a return to weak growth in the second half of the year and the Federal Reserve is giving careful thought to how to pull back its support when the time is right, Fed officials said Monday.
Conditions in financial markets, while still not normal, are improving and worries that a dangerous deflationary spiral could take hold have eased, the officials said.
Against that backdrop, the Fed — the U.S. central bank — will have to time carefully any decision to begin withdrawing the extraordinary volume of money it has pumped into the financial system or to raise interest rates, they said.
"The risk coming out of September-October was that we get into this deflationary psychology," St. Louis Federal Reserve Bank President James Bullard said in an interview on CNBC. "I think that's abating some."
If there are no more financial shocks, the U.S. economy could register a quarter of positive growth as soon as the July-September period, said Bullard, who is not currently a voter on the Fed's policy-setting panel.
"The third quarter, hopefully, it'll turn around," he said.
The Fed whittled overnight interest rates to near zero in December and has thrown more than $1 trillion into financial markets to revive lending and pull the economy out of the deep recession that began in December 2007.
Fed officials have committed to keeping interest rates low for an extended period to get the economy going again and to nurture a recovery. With rates near zero, other Fed actions, such as a commitment to buy up to $1.45 trillion in housing-related debt and $300 billion in longer-term U.S. government debt, have taken on greater significance in influencing lending and spending. more...
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