Fed, Citing Slowdown, to Buy U.S. Debt

The New York Times
8/10/2010

WASHINGTON — The Federal Reserve acknowledged on Tuesday that its confidence in the economic recovery had dimmed, and announced that it would use the proceeds from its huge mortgage-bond portfolio to buy long-term Treasury securities.

Saying it would buy relatively modest amounts of government debt, analysts said the Fed signaled that it had no intention to back away from steps that it took, starting in 2007, to prop up the financial and housing markets. While the central bank held off on taking more aggressive steps, like a new, huge round of asset purchases, it left open the possibility that additional easing of monetary policy could take place in the fall if the recovery were to continue to weaken.

The Fed’s new stance marked the completion of a turnabout from a few months ago, when officials were discussing when and how to eventually raise interest rates and gradually shrink the $2.3 trillion balance sheet the Fed amassed through its response to the 2008 financial crisis.

In buying new Treasury securities to the tune of about $10 billion a month — a small fraction of the roughly $700 billion in Treasury debt sitting on the Fed’s balance sheet — the Fed will not let the balance sheet shrink for the time being.

More than anything, the announcement was a signal to the markets that the Fed was concerned about the pace of the recovery, and had shifted from its more optimistic assessment earlier this year, that economic growth was sufficiently strong to begin thinking about how to gradually return to normal monetary policy.

For now, the Fed is saying, normal is a ways off. “Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months,” the Fed said in a statement.

Read the rest of this article at The New York Times.

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