Business as usual? Federal Reserve keeps interest rates near zero

Economic news worsened Wednesday as the House of Representatives voted on the stimulus package with the Federal Reserve Board’s Open Market Committee admitting that the “economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending.”

The bad news continued with Boeing announcing the layoff of 10,000 workers, and both ATT and Wells Fargo showing huge losses in profits foretelling possible additional layoffs.

The Federal Reserve indicated that some liquidity had been restored, but added that consumer credit remained extremely tight. In some areas of the financial sector, banks have resumed inter-bank loans. However according to some analysts’ trouble in the “real economy” is now dragging down the banking sector in a reciprocally downward spiral.

Deflation seems to be an increasing worry of the Federal Reserve, “the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.”

With rates near zero and little leverage, the Board made no changes, but said it would utilize all available tools. According to the New York Times, “The committee also served notice that it would purchase longer-term Treasury bonds, a move that would drive down long-term interest rates of all types.” The other mechanisms available to it are purchasing mortgage backed securities and Term Asset-Backed Securities Loan Facility to extend credit to consumers, however nothing so far has seemed to work.

Newspapers reported today that the Obama administration is likely to attempt several measures to jump-start the economy in addition to its stimulus package, as opposed to relying on only one. Nationalization of the banking system is a pro-working class option that is being considered in all but name.

Yesterday as reported by the Washington Post, in a letter to Congress Ben Bernanke said the Federal Reserve would use its buyout of billions in foreclosed mortgages to renegotiate loan terms and thereby assisting homeowners.

Some 2 million jobs have been lost in the last four or five months, adding to foreclosure crisis, particularly in California.