Fed takes action as US economic growth slows

THE US central bank will maintain its holdings of securities to stop money from being drained out of the financial system, in their first attempt to bolster the economy in more than a year.

The Federal Reserve said it will reinvest proceeds on its mortgage holdings into long-term US government debt. It 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 Fed said in a statement yesterday. “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, yesterday’s step signals that risks of a downturn have increased enough for the Fed to delay its exit from unprecedented stimulus.

Chairman Ben Bernanke told Congress last month that the Fed was “prepared to take further policy actions as needed”.

“With the economy slowing and inflation low, it is too early to pull in the horns,” said John Silvia, of Wells Fargo Securities. “The last thing they want is a smaller balance sheet.”

The New York Fed, in a subsequent statement, said it aims to keep its holdings in the System Open Market Account at about $2 trillion (€1.52tn). The Fed plans to “concentrate its purchases” in two-year to 10-year Treasuries, the statement said.

The Fed will “continue to roll over” its holdings of Treasury securities as they mature, it said. 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%, 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 Fed’s Open Market Committee 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”.

US central bankers repeated that inflation is “likely to be subdued for some time.”

Prices in June rose 1.4% from a year earlier, the third straight month of slowing gains.

Mr Bernanke said last week that “we have a considerable way to go to achieve a full recovery in our economy”.