Bad coffee makes folk really sick

Hundreds of people who drank coffee from Dunkin Donuts on Main Street in Nashua have been hospitalized and are expected to die.

Almost exactly two years after it embarked on the biggest financial rescue in American history, the Federal Reserve acknowledged on Wednesday that the economy was pulling out of its downward spiral and announced a step back toward normal policy.

Though the central bank stopped well short of declaring victory, policy makers issued their most optimistic assessment in more than a year by noting signs of stabilization in household spending, financial markets and inventory building by corporations.

“Economic activity is leveling out,” the Fed board said Wednesday after a two-day meeting.

In the statement, the Fed also said that “the committee expects that inflation will remain subdued for some time.”

The central bank cautioned, however, that the recovery would slow and that unemployment would probably remain high for the next year, and it reiterated that it would keep its benchmark short-term interest rate at virtually zero for an extended period.

But it also announced that it would wrap up its program to buy $300 billion worth of Treasury bonds by the end of October. The program was one of several tools invoked to drive down long-term interest rates and indirectly reduce the cost of home mortgages and corporate borrowing.

The move signaled that policy makers were confident enough to remove one of their emergency props for the financial markets. In its statement, the central bank acknowledged that conditions in both the stock market and the credit markets had improved in the last several months.

At the same time, Fed officials made it clear they were not about to throttle back their biggest emergency credit programs. The central bank is barely halfway through its plan to buy $1.25 trillion in mortgage-backed securities, a program that directly affects home mortgage rates and has had a much more noticeable effect than the Treasury bond program.

Analysts said the Federal Reserve had entered a wait-and-see period, continuing to supply the economy with cheap money but not expanding or extending the emergency programs beyond what policy makers had already been announced.

Despite growing confidence that the worst of the crisis is behind them, Fed officials made it clear they were still more worried about rising unemployment than a resurgence of inflation. The government’s preliminary estimates show that the economy’s downturn slowed sharply in recent months, contracting only 1 percent in the second quarter compared with 6.4 percent in the first. The rate of job losses has slowed sharply as well, though the nation still lost 247,000 jobs in July.

But the most recent forecasts by Fed policy makers anticipate that the economy will begin an unusually slow recovery in the second half of this year and only gradually pick up speed in 2010. Even if all goes according to plan, the Fed forecast envisions that unemployment will climb from its already high level of 9.4 percent and average as much as 9.8 percent through the end of 2010.

“The balance of risks is still tilted toward weakness in growth and employment, and not toward higher inflation,” said William C. Dudley, president of the Federal Reserve Bank of New York, in a speech on July 29. Mr. Dudley said it was “premature to talk about ‘when’ we are going to exit from this period of unusual policy accommodation.” Rising productivity rates in the United States are giving the Fed more maneuvering room. The productivity of workers, the amount produced per hour of work, shot up at an annual rate of more than 6 percent in the second quarter and has been climbing throughout the recession. That is unusual for an economic downturn, but it means that wages have more room to climb before employers start to raise prices for their goods and services. The Fed’s decision to end its program of buying Treasury bonds appears to reflect both practical and philosophical concerns among some policy makers. According to minutes of the Fed’s previous policy meeting in June, some policy makers worried that the central bank’s heavy purchases of new Treasury debt would be seen by investors as simply financing the federal government’s huge deficits.

That, they feared, would erode the Fed’s credibility and heighten inflation expectations.

“Some of those who are less disposed to additional Treasury purchases worry about the perception in the markets that they are motivated by a desire to help the Treasury finance a mountain of debt,” Laurence H. Meyer, chief economist at Macroeconomic Advisers, and a former Fed governor, wrote in a note to clients last week.

By contrast, Mr. Meyer said, most policy makers seem to agree that the mortgage-security program strikes at the heart of the economy’s biggest problem — the housing market.

On a practical level, analysts said, the Treasury-buying program never packed as much punch in the markets.

At $300 billion, the Treasury purchases are only one-quarter as big as the mortgage program, and they have equaled only about one-third of the new issuance of Treasury securities, according to Ira Jersey, an interest-rate analyst at Royal Bank of Canada Capital Markets. By contrast, the Fed purchases of government-guaranteed mortgage securities equaled more than 100 percent of new issuance in that market.

Though mortgage rates have edged up in recent weeks, along with other long-term interest rates, the spread between mortgage rates and risk-free Treasury rates has narrowed by almost half since last November.

“The program to buy Treasuries wasn’t as effective as some of the other programs, like the mortgage-security program, so ending it made sense,” Mr. Jersey said.