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Americas

Fed pledges more stimulus spending, says recovery slow

Text by News Wires

Latest update : 2010-08-11

The US Federal Reserve has said it will extend crisis measures, including exceptional stimulus spending and keeping interest rates low, and warned that economic recovery in the USA had slowed in recent months.

AFP - The US Federal Reserve promised more stimulus spending to prop up the economy 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 dollars into ailing markets.
   
Members of the 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 two-trillion-dollar 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 FOMC said.
   
The move was seen as "an unambiguous downshift in the Fed's assessment of... the current state of the economy," according to Ian Shepherdson of High Frequency Economics.
   
In early August, the Fed held around 1.2 trillion dollars in mortgage-backed securities, which it had hoped to whittle away.
   
"Prior to this new directive from the FOMC, the balance sheet was set to shrink by as much as 200 billions dollars per year," said Stephen Gallagher and Aneta Markowska of Societe Generale.
   
The pair added that the Fed's move might help stimulate a moribund housing market: "The Fed's investments in longer-dated 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."
   
But against stiff headwinds, the bank on Tuesday promised to keep interest rates at "exceptionally low levels...for an extended period."
   
Stock markets pared loses shortly after the announcement, with the Dow index replacing triple digit losses to close down 55 points, or around half a percent.
   
But it was not welcomed universally.
   
"The Fed is running scared," said Stephen Stanley of Pierpont Securities, accusing the bank of "exacerbating the environment of uncertainty by conducting policy erratically and feeding the sense of fear by wetting the bed over a soft patch (in the economy)."
   
But the Fed's move also seemed unlikely to end speculation about the need for more robust action.
   
"Simply reinvesting the proceeds from maturing agency securities will not provide much additional stimulus," said Michael Gapen of Barclays Capital.
   
"Should the outlook continue to worsen, then the Fed will likely initiate a new round of asset purchases."

Date created : 2010-08-11

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