The Congressional Budget Office (CBO) in a report issued in August, estimated that the US federal budget deficit for 2009 will total $1.6 trillion, which, at 11.2 percent of gross domestic product (GDP), will be the highest since World War II. The national debt, which was as low as 33 percent of GDP in 2001, would reach an estimated 54 percent of GDP this year and grow to 68 percent of GDP by 2019. CBO’s current estimate of the cumulative deficit under baseline assumptions over the 2010–2019 projection period now stands at $9.05 trillion, about $2.7 trillion higher than the 10-year deficit CBO projected in March.

The Federal Reserve on Wednesday acknowledged that a US economic recovery has begun but maintained its near-zero interest rate and trillion-plus dollar effort to support the fragile recovery.

The Federal Open Market Committee voted unanimously to maintain the federal funds rate of zero to 0.25 percent in place since last December, to help jolt the economy out of its worst recession in decades.

While policy makers expressed new optimism about growth, they also conveyed the challenges that lie ahead in dismantling the vast safety net that they have erected over the last year.

“Economic activity has picked up following its severe downturn,” the Fed said in a statement after a two-day policy meeting. It said financial markets had improved further, that activity in the housing market had increased and that household spending seemed to be stabilising.

But Fed officials warned that the recovery would be slow and repeated their commitment to keep the benchmark overnight interest rate at virtually zero for “an extended period” - - seen as an unchanged rate scenario well into 2010.

The FOMC headed by Fed chairman Ben Bernanke pledged to continue a program of more than one trillion dollars to help keep credit flowing to the housing market and other segments of the economy by purchasing mortgage securities and other bonds.

The panel said it would continue with a plan to buy up to $1.25 trillion of government agency mortgage-backed securities and up to $200 billion of other agency debt, continuing that effort into the first quarter of 2010.

The outlook on the economy was more optimistic than in August, when the panel said economic activity was "leveling out."

David Greenlaw, Morgan Stanley, said: "Today’s statement contained an interesting nuance in the wording used to describe the amounts that will be purchased. Previous statements had always indicated that 'up to $1.25 trillion' (for MBS) or “up to $200 billion” (for agencies) would be purchased. But, in this statement, the wording for the MBS program was changed to 'a total of $1.25 trillion' while the reference to the agency program was still 'up to $200 billion.' So, the Fed is now committing to the full $1.25 trillion of MBS purchases but leaving themselves some wiggle room to do less in the agency space. As seen in the accompanying slide, they have been falling well short of the implied trend in the agency purchase program. According to our trading desk, this reflects the fact that there has not been a lot of paper for the Fed to buy."

Peter Schiff, Euro Pacific Capital, commented: "The Federal Reserve is now pursuing a monetary policy based entirely on hypocrisy. In its statement today the Fed described an economy that is in the early stages of recovery. However, despite their largely upbeat assessment, the Fed nevertheless decided to hold interest rates to near zero for the forseeable future. If the economy was in fact improving, why would the Fed need to supply the cheapest credit in our history for as long the eye can see?

The Fed acutely understands that the American economy is on life support and that the IV drip is loaded with an unending supply of federal liquidity. Without the enormous Fed participation in the government and agency debt markets, our financial system would be completely frozen. Without federal deficit spending, industry bailouts, and consumer incentives, spending would be falling and our economy would be contracting. Ben Bernanke and Co. know that any diminution in the dosage of liquidity would threaten to put the economy back into cardiac arrest. Their hope seems to be that the longer we can prevent collapse, the better our chances for real recovery. But this is counterintuitive."

Millan L. B. Mulraine, TD Securities, said: "The main takeaway from the statement was the decision by the Fed to slowly wind down the unconventional monetary policy tools it has been using to resuscitate the ailing US economy. However, in recognition that the recovery (at least at its initial stages) will be tenuous at best, they continue to indicate their willingness to maintain their support for the economy, as they nurse it back to health, though they will reduce the dosage. As such, we continue to maintain our bias for the Fed to keep the policy rate at the current level until early 2011."

US gross domestic product (GDP), the broadest measure of economic activity, fell at an annualised rate of 1.0 percent in the second quarter, after a 6.4 percent drop in the January-March period.

In August, unemployment rose to a 26-year high of 9.7 percent and the broad measure of unemployment rose to 16.8 percent.

The broad measure includes total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.  Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.

FOMC statement

Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn.  Conditions in financial markets have improved further, and activity in the housing sector has increased.  Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.  Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.  Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. 

The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.  As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.  The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.  The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.