WASHINGTON — The Federal Reserve, signaling increased optimism that the economy is improving, is scaling back some of the emergency loan programs it created over the last 18 months to deal with the nation's financial crisis.
But the Fed is still concerned about the fragile state of financial markets and said it would extend several of the same programs until early next year in case they might be needed.
"Things have stabilized," said former Fed economist Timothy Yeager, an associate finance professor at the University of Arkansas. "There don't seem to be any more large firms on the brink of failure, and they feel confident that they can start to pull these things back. Yet they don't want to completely remove [the programs] in case they're needed down the line."
Together, the actions could mark the start of the Fed's exit from its unprecedented intervention into credit and other markets to keep the financial system from collapse. The announcement came after the Fed's Open Market Committee said Wednesday that it would keep interest rates near zero and continue expanding the money supply.
"Conditions in financial markets have improved in recent months, but market functioning in many areas remains impaired and seems likely to be strained for some time," the Fed said in announcing Thursday's moves.
The recession has shown signs of easing in recent weeks, but new federal data showed the difficulty in gauging whether the slump has bottomed out.
The Bureau of Economic Analysis on Thursday revised its figure for first-quarter gross domestic product, saying the economy contracted at an annual rate of 5.5%, an improvement from the 5.7% it had estimated.
And the Labor Department also reported Thursday that new jobless claims rose last week to 627,000, up 15,000 from the previous week.
Beginning in December 2007, the Fed launched several programs to improve liquidity and credit for businesses and other market functions. But as economic conditions have improved, use of those programs has declined, senior Fed officials said.
For example, the Term Auction Facility, which makes large amounts of money available to banks and other depositary institutions through auctions, has seen bid amounts decline considerably in recent weeks. As a result, the Fed's Board of Governors decided to reduce the amount of money available to $125 billion from $150 billion, beginning with the July 13 auction.
