Business

Monday, Nov. 02, 2009

Fed likely to hold rates at low levels

WASHINGTON — Even with the Federal Reserve widely expected to leave interest rates at a record low this week to nurture the fragile recovery, fissures are growing among policymakers about when to start boosting rates to head off inflation.

A shift to higher borrowing costs is probably months away, but Fed Chairman Ben Bernanke and his colleagues likely will privately debate how best to signal a change in stance to investors, businesses and ordinary Americans when they open a two-day meeting today.

At its last meeting in late September, the Fed opted to stretch out into early next year a key program aimed at forcing down mortgage rates. It isn’t expected to veer from that course this week.

Fed policymakers gather as the economy emerges from the worst recession since the 1930s to a much-anticipated recovery.

After a record four straight losing quarters, the economy started growing again last quarter, although most of the fuel came from government-supported spending on homes and cars.

Despite the turnaround, growth won’t be sufficient to prevent the unemployment rate — now at a 26-year high of 9.8 percent — from rising. Economists predict it will hit 9.9 percent when the government releases the latest snapshot on employment conditions Friday. It’s expected to top 10 percent this year.

Rising unemployment, cautious consumers, tight credit and troubles in the commercial real estate market are among the forces expected to weigh on the recovery going forward.

Against that backdrop, most economists think the Fed on Wednesday will keep the target range for its bank lending rate at zero to 0.25 percent. If it does, commercial banks’ prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will stay at about 3.25 percent, the lowest in decades.

“The Fed has some glide time right now to see where the economy is going,” said Wells Fargo’s chief economist John Silvia.