America's economy is picking up, says Federal Reserve

The US Federal Reserve issued its most upbeat assessment of the American economy in 18 months last night, saying activity was picking up after the most severe recession since the 1930s.

The central bank kept official interest rates at rock-bottom levels, but signalled that its programme of quantitative easing will start to taper off, now that credit markets are returning to normal.

The Fed is midway through buying $1.45 trillion (£883m) of mortgage-related debt to try to stimulate America's housing market, but it extended the deadline for finishing those purchases. Instead of having them done by the end of the year, it set a new date of 31 March 2010, suggesting that its purchases would be smaller and less frequent from now on.

"Economic activity has picked up following its severe downturn," the Fed's open market committee said in a statement after its two-day meeting. "Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilising."

Its official interest rate target remained 0 to 0.25 per cent, and the Fed warned that there was still a lot of slack in the economy. That will keep inflation low, it said, but the New York branch of the Fed has already begun discussing with market participants how it might quickly draw back some of the trillions of dollars it has pumped into the credit markets during the crisis, if the economy strengthens.

As the rate-setting open market committee examined the post-crisis economy yesterday morning, Tim Geithner, the Treasury Secretary, was on Capitol Hill pressing the case for new powers for the Federal Reserve and a wider reform of Wall Street regulation.

"We simply cannot walk away from the worst financial crisis since the Great Depression and not do everything in our power to reform the system," he told the House financial services committee.

The Obama administration has proposed giving the Federal Reserve and a council of regulators powers to monitor the financial system as a whole, not just individual banks, and to wind down firms that become so big that their bankruptcy would cause widespread disruption.

Barney Frank, the committee's chairman, signalled that he planned to move quickly on new legislation, and that he could go further than the Treasury's proposals. Borrowing language from the fraught debate over healthcare reform, Mr Frank said: "There will be death panels enacted by this Congress, but they will be for non-bank financial institutions."