WASHINGTON – Aug. 2, 2012 – The Federal Reserve set the stage to move as early as next month to jolt a weakened economy, but is holding off on new actions for now.
In a statement after a two-day meeting, the Fed’s policy-making committee signaled Wednesday that it could purchase more Treasury or mortgage bonds to lower long-term interest rates when it meets again in mid-September.
The Fed said it “will provide additional accommodation as needed to promote a stronger economic recovery” and job growth percent its most emphatic suggestion in months that it’s ready to aid a flagging recovery.
“This is signaling that if there is any deterioration in economic conditions between now and September, the Fed will do more,” said TD Economics economist Chris Jones.
Allen Sinai of Decision Economics called the statement “a promise,” adding that by not acting Wednesday, “the Fed is behind the curve.”
The Federal Open Market Committee said “economic activity decelerated somewhat” in the first half of 2012. In June, it said “the economy has been expanding moderately.”
Many economists say Friday’s government report on job growth in July could help determine whether the Fed will launch a new stimulus round. Job growth, manufacturing activity and consumer spending all have slowed in recent months.
If the recovery remains weak, the Fed next month will likely announce it will buy about $500 billion in government bonds, mostly mortgage-backed securities, RDQ Economics said. Mortgage bond purchases are believed to lower mortgage rates more than Treasury purchases.
Yet, the Fed is wrestling with how much more it can do to jump-start a sputtering economy. Long-term interest rates are already near historic lows. Many homebuyers and small businesses can’t qualify for loans because credit conditions remain tight.
In June, the Fed decided to extend a program to shift its portfolio from short-term to longer-term Treasury bonds in a more modest effort to lower long-term rates. Since 2009, it has bought about $2 trillion in Treasury and mortgage-backed securities to stimulate growth.
But the potential impact of such maneuvers is now more limited, and some economists worry they could feed inflation. The Fed could make less dramatic moves, such as cutting the interest rate it pays banks to keep money at the Fed, encouraging them to lend the money instead.
© Copyright 2012 USA TODAY, a division of Gannett Co. Inc., Paul Davidson, USA TODAY