Fed: Recession easing, inflation not a threat

WASHINGTON (AP) - The Federal Reserve on Wednesday said the recession is easing, but that the economy likely will remain weak and keep a lid on inflation.

Against this backdrop, the Fed held a key bank lending rate at a record low of between zero and 0.25 percent, and pledged again to keep it there for "an extended period" to help brace activity going forward.

Even though energy and other commodity prices have risen recently, the Fed said inflation will remain "subdued for some time." This new language sought to ease Wall Street's concerns the Fed's aggressive actions to revive the economy will spur inflation later on.

The Fed also decided to stay the course on existing programs intended to drive down rates on mortgages and other consumer debt. Instead, the central bank again kept the door wide open to making changes if economic conditions warrant.

The Fed in March launched a $1.2 trillion effort to drive down interest rates to try to revive lending and get Americans to spend more freely again. It said it would spend up to $300 billion to buy long-term government bonds over six months and boost its purchases of mortgage securities. So far, the Fed has bought about $177.5 billion in Treasury bonds.

The Fed is on track to buy up to $1.25 trillion worth of securities issued by Fannie Mae and Freddie Mac by the end of this year or early next year. Nearly $456 billion worth of those securities have been purchased.

In other economic news Wednesday, orders to U.S. factories for manufactured goods from computers to aircraft surged in May for a second straight month. And a gauge of business investment rose last month by the most in nearly five years. Together, the data signal that the recession could be at or near a bottom.

Yet new-home sales fell unexpectedly last month. Economists said the two reports painted a picture of an economy no longer in free-fall, but still unable to mount a sustained recovery from the longest recession since World War II.

The 1.8 percent increase in durable goods orders in May reported by the Commerce Department was far better than the 0.6 percent decline that economists expected. It matched the rise in April, with both months posting the best performance since December 2007, when the recession began.

Orders for non-defense capital goods, a proxy for business investment plans, jumped 4.8 percent, the biggest increase since September 2004. That could signal that businesses have stopped trimming their investment spending.

The back-to-back monthly gains in orders for durable goods - items expected to last at least three years - were further evidence that a dismal stretch for U.S. manufacturers may be nearing an end. But analysts say any sustained rebound is months away.

Rebecca Blank, undersecretary of commerce for economic affairs, cautioned against reading too much into the big jump in durable goods orders due to the volatile nature of the data. But she said the report appears to show that the recent plunge in activity has subsided.

"The $64,000 question is how long we will be in this flat period," Blank said in an interview. "You don't want to call too much of a recovery yet."

Private economists also were cautious. They noted all the problems still facing the economy, including rising unemployment, record levels of home foreclosures and spreading global economic weakness that's depressing U.S. exports.

"The U.S. factory sector still has a long way to go and is facing the headwind of one of the deepest global contractions in a generation," said Cliff Waldman, an economist with the Manufacturers Alliance/MAPI.

Brian Bethune, chief U.S. financial economist at IHS Global Insight, was a bit more optimistic. He said the economy was nearing a turning point "from recession to recovery."

The other Commerce Department report showed new home sales showed dropped 0.6 percent in May to a seasonally adjusted annual rate of 342,000, from a downwardly revised April rate of 344,000. Economists had expected a sales pace of 360,000 last month, according to Thomson Reuters. Sales were down nearly 33 percent from May last year.

The median sales price, $221,600, was down 3.4 percent from a year earlier but up 4.2 percent from April.

Excluding transportation, orders for durable goods posted a 1.1 percent rise in May, also better than the 0.4 percent drop that had been expected. Demand for transportation products rose 3.6 percent. That reflected a 68.1 percent jump in orders for commercial aircraft, a volatile category that had fallen 1.4 percent the previous month.

The big increase in aircraft offset further weakness in the troubled auto sector. Demand for motor vehicles and parts fell 8.1 percent in May, signaling disruptions from the bankruptcy filings at Chrysler LLC and General Motors Corp.

Orders for machinery rose 7.7 percent last month. Demand for computers and related products surged 9.4 percent.

The overall economy, as measured by the gross domestic product, shrank at annual rates of 6.3 percent in the final three months of last year and 5.7 percent in the January-March quarter - the worst six-month stretch for the GDP in more than 50 years. The government is scheduled to revise the first-quarter GDP figure Thursday, but analysts expect the revision will leave the overall figure unchanged.

U.S. economists at Deutsche Bank cautioned that "if the rest of the economy turns out to be weak, new orders for durables could ultimately be canceled."

Many economists say that GDP in the current quarter will show a much smaller decline, around 2 percent, with growth returning in the second half of this year.

Most analysts do not think the unemployment rate will turn around quickly. The jobless rate jumped to a 25-year high of 9.4 percent in May, and many economists say it could top 10 percent before the recovery gains enough strength to push unemployment lower.