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Fed will resume asset purchases, sees pace of recovery as 'more modest'

By Neil Irwin

Federal Reserve officials, concerned about an apparent slowdown in economic growth, Tuesday announced a new step to try to boost the economy by resuming purchases of long-term assets.

"The pace of recovery in output and employment has slowed in recent months," said the Fed policy-making committee Tuesday afternoon in a statement following their meeting. The committee expects a gradual strengthening of the economy, "although the pace of economic recovery is likely to be more modest in the near term than had been anticipated."

Their words about the softening recovery were backed by modest new actions to support growth, though the action is sufficiently modest that it is unlikely to have much direct impact on the economy. It does, however, show that the Fed, following a year in which it was focused on studying ways to exit from its efforts to support growth, is now attuned to what it might do to boost the economy.

The Fed holds $1.4 trillion in mortgage-related securities on its balance sheet. Under its previous policy, when those securities are paid off, such as when people refinance their homes, the Fed intended not to undertake any new purchases to replace them.
As a result, the size of the Fed's balance sheet was expected to shrink by $200 billion or so over the coming year, due to the routine maturing of those securities.

Now, the Fed will instead keep the size of its balance sheet--a key tool in managing the money supply--constant. It will buy Treasury bonds in order to replace the mortgage-related securities that mature.

"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 by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities," the statement said.

As they have at every meeting since December 2008, the Federal Open Market Committee elected to keep its target for short-term interest rates near zero and to pledge to keep rates there for an "extended period."

However, the Fed leaders did not elect to undertake other steps that might have amounted to easing of policy, such as strengthening their "extended period" language or indicating they will actually increase the size of the balance sheet.

Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, dissented from the decision, as he has at every meeting this year, preferring not to retain the "extended period" pledge nor to resume purchases of securities to hold the size of the balance sheet constant.

By Neil Irwin  |  August 10, 2010; 2:42 PM ET
Categories:  Federal Reserve  
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Next: Economic agenda: Wednesday, Aug. 11, 2010

Comments

Economic growth slowing, but Obama wants more taxes & amnesty for millions of illegal alien workers.

Man, the Democrats are SOOOO screwed in November!

Posted by: pmendez | August 10, 2010 3:51 PM | Report abuse

The only way to Boost the economy is to vote Obama out of office

Posted by: akeegan2 | August 10, 2010 3:56 PM | Report abuse

What a disaster.

"I'm broke. I need to spend more money. I need to borrow more."

Does anybody run his/her life this way?

If you do, how is it working out for you?

Posted by: Anonymous | August 10, 2010 3:58 PM | Report abuse

What a load ... The 'FED' controls the money supply
========
"As a result, the size of the Fed's balance sheet was expected to shrink by $200 billion or so over the coming year, due to the routine maturing of those securities
=========

They will just PRINT MORE MONEY to make up any shortfall .... duh ! These 'Beauracrats' (actually the 'fed' is a PRIVATELY owned BANKING group) have us all by the short hairs President Obama included. We are their slaves and their dupes !!!

Posted by: killerm1 | August 10, 2010 4:01 PM | Report abuse

US economy will go down and down compared to Europeans, Chinese, etc. economies, as evident by Euro being so MUCH MORE VALUABLE than US Dollar, as evident by so many banks collapsing in US resulting in the massive Government bail outs of the Banks and Autos, etc. etc. UNLESS we address the fundamental problems of the US economy, which problems at their core are due to what Utter Complete Lunatics Republicans in US are and how right-wing (which means Lying for the benefit of the Super rich aka Wall Street gang and War profiteers) 99% of US Media is that it has enabled the Republicans to get away with their Lunacy.

And how Democrats have been not much different than Republicans either, to date as of 2010, once in the office as evident by Obama/Dems that have done really nothing to address these fundamental problems. To be exact the Rich will get richer, it is the Middle class that will get decimated, the rich will get richer as per the $750Bill that Republicans and Democrats gave the Wall Street banks (aka TARP) without even requiring that the top brass of the these banks rescued by peoples Taxes, aka Socialism, not to receive any more Multi Million Dollar bonuses, etc. but be paid the same salary as a 4 Star General at the most. So what are the fundamental problems with US economy which the Republican lunatics do not even acknowledge as being the fundamental problems with US economy and Democrats have barely if any addressed them, they are:


1- Our money (Taxes) wasted on unnecessary Wars.
2- Our money (Taxes) wasted on a Gargantuan Military.

3- Our money (Taxes) not invested in our people and cities as Europeans do with Universal Single Payer Health Care, Universal Education and many other social services.

More:
http://RealNewsPost.com?n=think.32414

Posted by: Thinkdeeper | August 10, 2010 4:04 PM | Report abuse

pmendez,
Did you even read the article? Your comments have absolutely nothing to do with the topic being covered.

akeegan,
Yes, absolutely, everyone knows that the Republicans support legislation that favors big business. Big corporate America would love to have Republicans back in charge, so that they can do away with pesky unions, safety regulations, and Americans getting jobs.

Posted by: RGee1 | August 10, 2010 4:04 PM | Report abuse

The Fed will be cranking up those printing presses: hyperinflation, here we go.

I'm dumping my cash investments very soon.

Posted by: Anonymous | August 10, 2010 4:07 PM | Report abuse

the Fed owns mortgage securities? What? SInce when did that become a role for the Fed. Silly me, I thought the Fed existed to manage the money supply. Who knew they also were meant to play the market?

Posted by: Anonymous | August 10, 2010 4:11 PM | Report abuse

The Democrats grotesque misallocation of capital is a disastrous move and Bernanke knows it. We will not survive as the economic superpower, as Tim Geitner stated (paraphrased) 'the world will have to look elsewhere for growth.' The real wuestion is, is this planned, as in 'never let a crisis go to waste'

Posted by: Anonymous | August 10, 2010 4:11 PM | Report abuse

The Federal Reserve provision of liquidity did spur consumption, investment in some class of assets (e.g. equity) and generated positive economic momentum. However, a weak labor market indicates that the quantitative monetary policy easing was not strong enough to boost prices and keep economic momentum going.

Since the recovery running out of steam, policy analysts and media outlets are proposing a host of monetary policy prescriptions, focusing on restarting Quantitative Easing by massive large-scale purchases of mortgages or government bonds.

With the prospect of deflation, monetary policy alone without strong fiscal policy has a marginal effect in stimulating the economy. By expanding Quantitative Easing by doing portfolio-restructuring, the Federal Reserve will expand the beneficial effects directly into the corporate financing environment.

Please see article that appeared in:
http://thewallstreetchallenger.com/Index/Monetary_Policy_Prescription.htm

Posted by: GigelM | August 10, 2010 4:11 PM | Report abuse

Mr. Irwin, how do you write this nonsense with a straight face? What the Fed signaled was their fear that we are in a deflationary cycle - a full scale DEPRESSION. And, to mitigate the bad news, they filled the hogs trough that our Wall Street class feeds on, who will stick their snouts in and eat their fill. And what these bloated swine will eventually vomit out is offshore investments in China and India and elsewhere in Asia, sinking this country even more.

Posted by: mibrooks27 | August 10, 2010 4:15 PM | Report abuse

We are now close to destruction of our country and American citizens,both economically and militarily.Only the US Military can rapidly turn around our country fronm these incompetent,corrupt,anti-America,arrogant,tax cheating,massive spender ,massive debt,4 islamic terroristattacks onour homeland,islamic loving,abusive,tyrannical civilian gov't. The US Military shpould takover temporarily in a bloodless,orderly and peaceful manner the present incompetent and corrupt gov't since the US Military is the most disciplined military in the world,their leaders are much smarter than Harvard graduates coming from the US Military Academy at Westpoint, more patriotic,honest,strong ,loyal ,brave,uncorrupted ,country ,duty honor and will restore and protect our financial and military power..

Posted by: Anonymous | August 10, 2010 4:26 PM | Report abuse

Talk about "active" and "boosting" the economy does not seem to make much sense. What seems to have happened is that the Fed has conceded that the economy is still in such bad shape that even small steps to begin taking it off life support are a mistake. The Fed has no power to do anyting active about fixing the economy. But supporting the interest rate on Treasury Bills presumably gives the government some more room to take on some more debt both in providing the extended safety net that clearly is going to be required and also perhaps in some active efforts that might actually help our economy began to move forward.

Posted by: Anonymous | August 10, 2010 4:26 PM | Report abuse

Fed will keep on playing with the monetary policy it does not cost them anything. Most they do is every 4 weeks get together and make a statement.
The funny(?) part is stock market waits to hear their words and then show the rest their reaction by moving the Dow up or down.
Small investor that may make money is basically by chance as it is generally driven by big investors that manipulate the market.
It is a Yo Yo Market.

Posted by: Anonymous | August 10, 2010 4:30 PM | Report abuse

Those mortgage backed securities the Fed hides are the worst of the worst paper. Paid off, refinanced ?? Haha. They are worth cents on the dollar and getting cheaper by the day.

Bond markets are betting deflation. The manipulated equity markets are betting inflation. One of the two is wrong. Guess which ??

The central banks have created an even bigger mess sporting a longer duration than anyone now realizes. The evidence will reveal itself soon.

We are only in the third inning of a nine inning game.

Posted by: Anonymous | August 10, 2010 4:31 PM | Report abuse

The DEMORATS misappropriation of our debt as stimulus has been grotesque and unconstitutional. The Dems controlled the purse string since 2006 (and determined banking/lending regulations much longer via self-interest conflicted banking chairman Barney Frank, Dodd, etc) and now Pelosi and OBAMA's $1T USD private slush fund has been used as an excuse to maintain the status quo, prop up zombie companies, Wall St. crony capitalists - who donate far more to the Dems - like Obama/Pelosi/Reid than to the few non-RINO Republicans that are worth keeping around). This only lengthens the downturn, misallocating even more resources to less efficient uses and crowding out the private sector that is the only source of real production and growth that stands a chance of getting us out of the ditch. Yet Dems are still blaming Bush, as if conservatives didn't protest his irresponsible spending or soft socialism. Time to grow up Democrats, stop the cheap rhetoric, face facts and move out of your abusive codependency relationship w/Big Gov't-or can't you cope in the real world of responsible, transparent and HONEST adults?
Go ahead Blame Bush-we don't care, get over it already!!

Posted by: Anonymous | August 10, 2010 4:35 PM | Report abuse

The Spend Side Keynesian experiment has failed-Big Time! Time to learn some real economics (before the Depression hits), e.g. from austrian Ludwig Von Mises "It has often been suggested to “stimulate”economic activity and to “prime the pump” by recourse to a new extension of credit which would allow the depression to be ended and bring about a recovery or at least a return to normal conditions; the advocates of this method forget, however, that even though it might overcome the difficulties of the moment, it will certainly produce a worse situation in a not too distant future."

Posted by: Anonymous | August 10, 2010 4:49 PM | Report abuse

Looks like the ending is going to be most unpleasant.The good old USA has degenerated into a full fledged plutocracy.As David Stockman recently said "republicans ruined america"Lets face the facts ,the party is OVER!South america,here I come !

Posted by: hyroller56 | August 10, 2010 4:53 PM | Report abuse

So, they're selling assets to BUY more Obama Government DEBT of NOTHING productive!

So, taking money from the more productive job creation PRIVATE sector, and give it to the Public and very inefficient sector!

Standard of Living going DOWN; except, for the unproductive government employees!

Posted by: theaz | August 10, 2010 4:53 PM | Report abuse

We need to dissolve Too Big To Fail banks that don't lend more than 50 percent of their loan capital to US small business and US consumers.

Period.

TODAY.

And we need the Two foreign civil wars of Republican adventure ended in Iraq and Afghanistan - TODAY. Zero al-Qaeda there. NADA. None.

Posted by: WillSeattle | August 10, 2010 4:58 PM | Report abuse

Oh, and now that Sen. Ted Stevens is dead, cut the welfare payments to the Red Welfare State of Alaska in HALF.

Time to make them live the way they talk.

No welfare for you!

Posted by: WillSeattle | August 10, 2010 5:00 PM | Report abuse

Read Paul Krugman and Nouriel Roubini who predicted the crash (on a weekly basis).

Krugman thinks we are in the beginning of a Third Great Depression, due to balanced budget-hard liners, and the deficit demented.

As many economists have noted, not merely these two geniuses, the stimulus package was far, far short of what we needed.

We SHOULD be pumping billions more into the economy.

Idiots, the danger is deflation, NOT inflation.

Posted by: farnaz_mansouri2 | August 10, 2010 5:24 PM | Report abuse

Read Paul Krugman and Nouriel Roubini who predicted the crash (on a weekly basis).

Krugman thinks we are in the beginning of a Third Great Depression, due to balanced budget-hard liners, and the deficit demented.

As many economists have noted, not merely these two geniuses, the stimulus package was far, far short of what we needed.

We SHOULD be pumping billions more into the economy.

Idiots, the danger is deflation, NOT inflation.

Posted by: farnaz_mansouri2 | August 10, 2010 5:25 PM | Report abuse

I just hope enough people are finally ready to question our financial system in a constructive way. The Fed is not the problem, at this time it is the only viable solution; the whole global debt based financial structure needs to be re-visited. I refuse to buy ANYTHING on credit. I will pay cash for a home when they come back down to sane prices. I paid cash for my car. A home is NOT an investment-it is a place to live.

How about this to fix our financial system: a constitutional amendment requiring a permanent 1:1 trade ratio with all non-NATO countries. If China wants to continue selling their products here something's got to change. Let's aggressively re-negotiate all trade treaty's and all outstanding debt.

However, it is pretty slick if you think about it: by selling our debt to China we're actually forcing them to fund the aircraft carriers we've got parked off their shores. On second thought, keep up the good work Mr. Fed.

Posted by: timtiminhouston | August 10, 2010 8:06 PM | Report abuse

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