Wary Fed set to buy US debt
Recovery moving at a slower pace
WASHINGTON — As recently as two months ago, the Federal Reserve sounded optimistic about the economic recovery. Now the central bank is taking a new step that shows it is clearly more worried, but economists say it probably will not help much.
The Fed said yesterday that it would spend a relatively small amount of money — about $10 billion a month, economists estimate — buying government debt. The move is designed to drive interest rates on mortgages and corporate borrowing at least a little lower and help the economy grow faster.
In a statement after a one-day meeting, the Fed said the pace of the recovery “has slowed in recent months.’’ After its last meeting in late June, the Fed was rosier, saying that the recovery was proceeding and the job market actually improving.
The decision to buy government debt, using proceeds from Fed investments in mortgage bonds, was a shift from earlier this year, when the Fed was laying out plans to roll back some of the measures it took during the financial crisis.
At that time, the Fed was also preparing a strategy to begin raising interest rates again, a step taken to keep a growing economy from overheating. Now, though, the Fed has decided to keep its benchmark interest rate near zero.
“I don’t think they are going to raise interest rates until it is very clear that unemployment is moving definitively lower and that doesn’t look likely until late 2011,’’ said Mark Zandi, chief economist at Moody’s Analytics.
Economists pointed out that buying $10 billion of government debt in a $14 trillion economy is a relatively small move, and they said they did not expect it to have a dramatic impact.
“The Fed talked loudly but carried a small stick,’’ said Joel Naroff, president of Naroff Economic Advisors.
He said that while the financial system has the money to lend, banks are unwilling or unable to find suitable loans to make.
Until they do, he said, “the recovery will be softer than anyone hoped for, and there may be little the Fed can do about it.’’
With interest rates so low, economists note, Congress has more power than the Fed to stimulate the economy. But with midterm elections nearing, Congress is divided on whether the best move is short-term government spending, tax cuts, or some combination.
Investors reacted positively to the Fed statement. Stocks were down sharply before the announcement but made up ground after it was announced at mid-afternoon.
The Dow Jones industrial average finished down about 55 points.
Treasury prices rose slightly because the Fed plan would reduce the amount of government debt on the market for others to buy.
It said that it would buy additional government debt as its existing Treasury bonds mature.
In 2007, before the recession and financial crisis struck, the Fed balance sheet was roughly $860 billion.
It responded to the emergency by flooding the financial system with cash, expanding the balance sheet to about $2.3 trillion.
Rather than rolling it back, as the Fed had hoped to do as the economy improved, the Fed will keep the balance sheet steady while shifting its holdings out of mortgage securities and into more government debt.
The central bank said it expects to start buying the government debt Aug. 17 and planned to publish details today.