Fed takes small step to bolster economy

Federal Reserve officials will
maintain their holdings of securities to prevent money from being drained out
of the financial system in their first attempt to bolster the economy in more
than a year.

The central bank said it will
reinvest principal payments on its mortgage holdings into long-term Treasury
securities. The Fed retained a commitment to keep its benchmark interest rate
close to zero for an “extended period.”

“The pace of economic recovery is
likely to be more modest in the near term than had been anticipated,” the
Federal Open Market Committee said in a statement after meeting in Washington.
“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.”

With growth slowing in the second
quarter and company job gains in July falling short of estimates, the step
signals risks of a downturn have increased enough for the Fed to delay its exit
from unprecedented stimulus. Chairman Ben S. Bernanke told Congress last month
that the Fed was “prepared to take further policy actions as needed.”

The central bank will “continue to
roll over” its holdings of Treasury securities as they mature. The reinvestment
policy applies to agency debt and agency mortgage-backed securities held by the
central bank.

The central bank left the overnight
interbank lending rate target unchanged in a range of zero to 0.25 per cent,
where it’s been since December 2008. High unemployment, low inflation and
stable price expectations “are likely to warrant exceptionally low levels of
the federal funds rate for an extended period,” the Fed said, repeating
language from every policy meeting since March 2009.

“The pace of recovery in output and
employment has slowed in recent months,” the FOMC said. The Fed will “continue
to monitor the economic outlook and financial developments and will employ its
policy tools as necessary to promote economic recovery and price stability.”


Traders check prices on the floor of the New York Stock Exchange.
Photo: Wall Street Journal

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