Fed likely to leave rates at lows to aid recovery

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WASHINGTON (AP) – Signs are growing that an economic recovery may finally be taking shape, but with dangers still lurking about, Federal Reserve policymakers are all but certain to leave a key interest rate at record lows to make sure any nascent turnaround gains traction.

Fed Chairman Ben Bernanke and his colleagues are slated to wrap up a two-day meeting on Wednesday afternoon, where they will take fresh stock of the nation’s economic and financial conditions. So far, barometers suggest the worst recession since World War II is ending, and that the economy has started to grow again – or will soon.

With the economy turning a corner, the Fed also will weigh whether consumer lending programs intended to ease the recession and stem the financial crisis should be extended.

“I think the Fed will show a bit more confidence in the staying power of the coming economic recovery and indicate that everything is on track,” said Mark Zandi, chief economist at Moody’s Economy.com.

Still, the Fed has warned that recoveries after financial crises tend to be slow. And dangers remain.

While unemployment dipped to 9.4 percent in July, the Fed says it’s likely to top 10 percent this year because companies won’t be in a rush to hire. That could restrain the recovery if it crimps spending by already-cautious consumers.

Another risk comes from the troubled commercial real market where defaults on loans are rising. That’s a strain on banks holding such loans. The increasing risk is making lenders ever-more stingy about handing out new commercial real-estate loans or refinancing existing ones.

“That’s one of the things (Fed policymakers) might want to single out that keeps them worried,” said Michael Feroli, economist at JPMorgan Economics.

Against that backdrop, the Fed is widely expected to hold a key bank lending rate at a record low near zero on Wednesday. The central bank also is expected to renew a pledge to hold that rate there for an “extended period.” It has leeway to do this because the Fed believes inflation will stay low for a while.

Economists predict the Fed will leave its target range for its banking lending rate between zero and 0.25 percent through the rest of this year. The rationale: super-low lending will spur Americans to spend more, which would support the economy.

If the Fed holds its key rate steady, that means commercial banks’ prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will stay around 3.25 percent, the lowest in decades.