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Wednesday, April 29, 2009

Federal Reserve Says Recession May Be Easing

WASHINGTON (AP) -- The Federal Reserve said Wednesday it sees signs the recession is easing and that the economic outlook has "improved modestly" since last month.

Against that backdrop, Fed Chairman Ben Bernanke and his colleagues left a key interest rate at a record low of between zero and 0.25 percent, and decided against taking any new steps to shore up the economy.

Aggressive action already taken -- including a $1.2 trillion effort last month -- should gradually help bolster economic activity, the Fed said. It did, however, leave the door open to future action if needed.

Fed policymakers offered a less dour assessment of the economy than the one provided at its previous meeting in mid-March.

"The economy has continued to contract, though the pace of contraction appears to be somewhat slower," the Fed said. The worst of the recession -- in terms of lost economic activity -- could be past.

The economic outlook has "improved modestly" since the March meeting, partly reflecting some easing of strains in financial markets, the Fed said. Even so, "economic activity is likely to remain weak for a time," the Fed added.

And while consumer spending has shown "signs of stabilizing," it is still being constrained by rising unemployment, falling home values and hard-to-get credit, the Fed said.

The Commerce Department on Wednesday reported that the economy shrank at a 6.1 percent pace in the first quarter, worse than the 5 percent annualized decline that economists expected. The weak economic performance nearly matched the 6.3 percent contraction in the final three months of last year, which was the worst pace in a quarter-century.

But consumer spending rose unexpectedly in the January-March period and some analysts stuck to predictions that the economy would shrink less in the current quarter -- at a pace of 1 to 2.5 percent -- as the administration's $787 billion stimulus plan begins to take hold. Those analysts also continue to hope the economy would start to grow again in the final quarter of this year.

Still, weak sales and credit difficulties have forced businesses to cut spending and lay off workers, the Fed said.

To nurture economic activity, the Fed pledged anew to keep its key bank lending rate at a record low "for an extended period." Economists predict the Fed will keep the rate there well into next year.

Looking ahead, the Fed didn't rule out expanding existing programs or creating new ones to bolster the economy.

At its March meeting, the Fed launched a $1.2 trillion effort to lower interest rates and get Americans to boost spending, which would help spur economic activity.

Specifically, the Fed in March said it would start buying government debt -- $300 billion over the next six months -- and would buy an additional $850 billion worth of mortgage-backed securities and debt from mortgage giants Fannie Mae and Freddie Mac.

The Fed on Wednesday said it will continue to evaluate "the timing and overall amounts" of its government securities purchases in light of evolving economic and financial conditions.

A Fed spokesman was not immediately available Wednesday afternoon to say how much the central bank already has purchased under the new program.

The Fed hopes its various efforts will get banks to lend again, lower interest rates and increase Americans' appetites to spend, which would help lift the country out of a recession that began in December 2007.

Much hope is riding on the program called the Term Asset-Backed Securities Loan Facility, or TALF. It's been hobbled by rule changes, investor worries about financial privacy and fears that participants might become ensnared in an anti-bailout backlash from the public and Congress. Just $1.7 billion in loans was requested for the second round of funding in April — down from $4.7 billion in March.

Investors use the money to buy newly issued securities backed by auto and student loans, credit cards and other debt. The program will be expanded to include commercial real-estate loans.

Bernanke has said the recession probably would end this year if the government is successful in repairing broken banking and credit systems.

However, analysts warn that any severe outbreak of the swine flu would not only clobber tourism, food and transportation industries, but crimp spending on other things if consumers get spooked. For now, analysts are hopeful that any economic fallout will be limited and short-lived. But much hinges on the scope of the flu infections and how they affect consumer behavior.

Even if the recession ends this year, the jobless rate -- now at a quarter-century high of 8.5 percent -- is expected to keep rising and top 10 percent early next year.

Source:  By Jeannine Aversa, AP Economics Writer
Manufacturing.Net - April 29, 2009

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