Nurturing a nascent recovery, Federal Reserve policymakers are sure to leave a key interest rate at a record low and probably will keep other economic supports in place.
Fed Chairman Ben Bernanke and his colleagues are slated to wrap up a two-day meeting Wednesday afternoon, when they are expected to announce that the recession is likely over and that the nation's economic and financial climate is improving. But they'll also warn that rising unemployment, and still hard-to-get-credit for many people and companies, will make for a plodding rebound.
"We're kind of in an economic purgatory right now. We're in a recovery but it won't feel like one to Main Street," said Stuart Hoffman, chief economist at PNC Financial Services Group. "There's still a lot for the Fed to do to foster a lasting economic recovery."
Bernanke last week said the recession is "very likely over," his most optimistic assessment in months. And with the economy turning a corner, the central bank will examine the effectiveness of emergency programs to encourage spending and borrowing — critical ingredients to underpin the rebound.
Of great interest is whether the Fed will make any changes to a program intended to lower rates on home mortgages and support the housing market.
Not wanting to pull the plug too soon and risk short-circuiting progress, the Fed could opt at Wednesday's meeting — or perhaps later this year — to extend the program, some analysts said. The Fed's current goal is to buy $1.45 trillion in mortgage-backed securities and debt issued by Fannie Mae and Freddie Mac by year-end. Roughly $775 billion has been bought so far.
The Fed also could gradually reduce the size of its purchases. At its previous meeting in August, some Fed officials said a "tapering" of the mortgage-buying program "could be helpful," according to minutes of the private deliberations. Or the Fed could leave the program alone, as many anticipate.
The housing market has been propped up by the Fed's program. Rates on 30-year home loans dropped to 5.04 percent last week, compared with 5.78 percent a year earlier, Freddie Mac says. But the housing sector's health remains precarious as foreclosures continue to mount.
It's a fine line Fed policymakers have to walk. They need to leave programs intact long enough to support the recovery but not too long as to unleash inflation later on.
For now though, inflation isn't a problem.
Despite some improvements, factories are still operating well below capacity, one force that should keep a lid on inflation. Other factors keeping prices in check include the weak job market enabling employers to avoid wage increases, and cautious shoppers making companies wary of raising costs.
As the recovery gains traction, however, the Fed will face more pressure to wind down some emergency programs.
At the central bank's meeting in August, policymakers said they would gradually slow the pace of a program to buy $300 billion in Treasury securities and shut it down at the end of October, a month later than previously scheduled. That program is designed to force rates down for mortgages and other consumer debt to get Americans to spend more. Roughly $294 billion has been purchased so far.
But the program's effectiveness has been questioned on Wall Street and on Capitol Hill. Critics have complained that the Fed appears to be printing money to pay for the government's spending binge.
Most economists think the Fed will keep the target range for its bank lending rate at zero to 0.25 percent through the rest of the year. That would keep commercial banks' prime lending rate — used to peg rates on home equity loans, certain credit cards and other consumer loans — at about 3.25 percent, the lowest in decades.
The goal behind leaving rates at super-low levels is to entice people and businesses to step up spending to aid economic growth.
After suffering a free-fall, the economy is growing at a pace of 3 to 4 percent in the current quarter, many analysts predict.
Factory activity is increasing. Home sales are firming and prices are edging up in some cases. Consumer spending is stabilizing, and car-buying got a lift from the Cash for Clunkers rebate program.
But Bernanke warned that the pace of economic growth in the months ahead probably won't be strong enough to generate many new jobs and prevent the unemployment rate from rising. The rate hit a 26-year high of 9.7 percent in August and is expected to top 10 percent this year.
"The house is no longer on fire, but that doesn't mean there aren't a couple of embers burning," said Richard Yamarone, economist at Argus Research. "The Fed's job is not done yet."