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Fed holds policy steady amid slow recovery

Aug. 9, 2011 at 4:33 PM   |   Comments

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WASHINGTON, Aug. 9 (UPI) -- The Federal Reserve said U.S. economic growth was "considerably slower" than expected, but left its economic policy intact after a critical committee meeting.

Fed Chairman Ben Bernanke told the House Financial Services Committee on July 13 that the central bank's makers "don't know where the economy is going to go."

On Tuesday the Fed said, "Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the committee expected."

The Fed said it would keep its federal fund rate at zero to 0.25 percent, then took the rare step of saying the rate would likely hold "at least through mid-2013."

The central bank is rarely that specific, tending to prefer the term "for an extended period," rather than sound committed to a particular policy.

The Open Market Committee also said it would maintain its existing policy of "reinvesting principal payments from its securities holdings," which would keep its portfolio of holdings at a steady size by purchasing securities at the same pace that its current securities mature.

The short Fed statement said, "Indicators suggest a deterioration in overall labor market conditions in recent months." Consumer spending is flat and the housing market remains "depressed," the Fed said.

Inflation has been muted, with commodity inflation slowing down after putting on a burst of steam earlier in the year.

"More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks," the Fed said.

In last month's testimony, Bernanke testified, "we have to keep all the options on the table" to maintain financial-system stability.

Among those options were "untested" strategies to stimulate growth, he said.

"The main message I want to leave is that this is a serious situation," Bernanke said.

Since December 2008, the Fed has held its benchmark short-term interest rate -- which commercial banks charge among themselves for overnight loans -- near zero, which has flooded the U.S. financial system with nearly interest-free money.

The central bank has also amassed a portfolio of $2.9 trillion in U.S. Treasury securities and mortgage-backed securities, driving down long-term interest rates by accepting low rates.

Analysts say the Fed could buy more assets but this could add to inflation, which has risen about 2 percent this year, and Bernanke has said the Fed does not want to fuel concerns about rising prices.

For some, however, the Fed appears out of options for stimulating the economy, especially with the key lending rate near zero, which is as low as it can go.

The Fed, however, can re-institute a more aggressive securities purchasing program or set up other lending facilities to provide liquidity in niche financial markets.

"One thing we know about Bernanke is that he is willing to be extremely aggressive, and he is quite creative at the same time," Gluskin Sheff + Associates Chief Economist and Strategist David Rosenberg told the Financial Post.

Topics: Ben Bernanke
© 2011 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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