The US Federal Reserve promised more stimulus spending to prop up the economy on Tuesday, as it warned the recovery had slowed.
Facing pedestrian growth rates and high joblessness, the Fed vowed to renew crisis-era measures that pumped hundreds of billions of US dollars into ailing markets.
Members of the US Federal Open Market Committee downgraded their assessment of the health of the world’s largest economy, saying growth “has slowed in recent months.”
The 10-member committee warned “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”
In a sign of how seriously Washington is viewing the slowdown, the Fed promised to maintain crisis measures, which had been due to end.
The bank had battled the worst recession in a generation by buying up US debt, mortgage-backed securities and other financial products to lubricate markets.
The Fed said it would now reinvest cash from maturing mortgage bonds rather than shrink its US$ 2 trillion portfolio as planned — essentially resuming crisis-era spending.
“To help support the economic recovery in a context of price stability, the committee will keep constant the Federal Reserve’s holdings of securities at their current level,” the committee said.
The move was seen as “an unambiguous downshift in the Fed’s assessment of ... the current state of the economy,” Ian Shepherdson of High Frequency Economics said.
Earlier this month, the Fed held about US$1.2 trillion in mortgage-backed securities, which it had hoped to whittle away.
“Prior to this new directive from the [committee], the balance sheet was set to shrink by as much as US$200 billions per year,” Stephen Gallagher and Aneta Markowska of Societe Generale said.
The pair added that the Fed’s move might help stimulate a moribund housing market: “The Fed’s investments in longer-dated [US] Treasury debt should … lower mortgage and other borrowing rates.”
In June, the Fed had said the economic recovery was “proceeding” despite headwinds and would remain “moderate for a time.”
However, against stiff headwinds, the bank on Tuesday promised to keep interest rates at “exceptionally low levels … for an extended period.”
With interest rates so low, the US Congress, economists note, has more power than the Fed to stimulate the economy. However, with congressional elections nearing, Congress is divided on whether the best move is short-term government spending, tax cuts or some combination.
On Tuesday, the US House of Representatives, called back from its summer break for a one-day session, pushed through a US$26 billion bill to protect 300,000 teachers, police and other workers from layoffs this year. US President Barack Obama signed it almost immediately.
The Fed action also came on a day when new figures showed worker productivity in the US dropped during the second quarter for the first time in more than a year — a sign that companies that want to grow may need to hire more people.
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.
US Treasury prices rose slightly because the Fed plan would reduce the amount of government debt on the market for others to buy.
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