Fed Under Pressure To Help Economy

Federal Reserve headquarters in Washington i i

The Federal Reserve headquarters in Washington. Policymakers are meeting to discuss interest rates, and there's speculation they will announce new strategies to stimulate growth. AP hide caption

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Federal Reserve headquarters in Washington

The Federal Reserve Bank headquarters, Washington, D.C.

AP

Federal Reserve policymakers are meeting Tuesday to discuss interest rates, and there's speculation they will announce new strategies to stimulate growth.

After Friday's disappointing jobs report, the central bank is under some pressure to come up with new ways to boost the economy.

One idea would be for the Fed to purchase more mortgage-backed securities and government debt. That would essentially pump money into the financial system to encourage lending. Officials also could try to reassure the financial markets by emphasizing in the statement they issue that they are likely to keep interest rates low for the foreseeable future.

Both steps would signal to markets that money could be borrowed cheaply for a longer period of time, giving businesses and individuals more confidence to finance major purchases. Still, economists doubt how much impact they would have. Interest rates are already at historic lows, and that hasn't generated more buying activity.

"Fed policymakers could consider token moves like this, but I don't think they are ready to do a lot more," said James O'Sullivan, chief economist at MF Global.

A bolder step would be to restart programs undertaken during the financial crisis that involved large-scale purchasing of mortgage-backed securities and government debt.

But the Fed could also adopt a wait-and-see approach. The meeting takes place at a time when the U.S. economy is growing but at a relatively slow pace, and the unemployment rate remains at 9.5 percent, with anemic hiring from the private sector.

David Wessel , economics editor at the Wall Street Journal, tells NPR's Steve Inskeep that the Fed is also seriously worried about deflation.

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With deflation, "it's not just prices that fall. Wages fall, too. [And] it makes it hard to pay back your debts because your income may go down, but the size of your mortgage or your car loan will not," Wessel says.

Deflation makes it hard for the Fed to stimulate the economy, he notes. Usually, the Fed pushes interest rates below the inflation rate, which means the inflation-adjusted interest rate is negative, Wessel says. "But you can't do that once you get to zero, and that's where they are now."

Whatever they do, policymakers are also trying not to rattle Wall Street. In morning trading, the Dow Jones industrial average and other major U.S. stock indexes were down about 1 percent, following lower overseas markets after China's economy showed some signs of slowing down.

"There was some anticipation the Fed could announce additional liquidity measures like the purchase of bonds," says Craig Peckham, market strategist at Jefferies & Co. "It's a little premature for the Fed to expand. We don't think there will be any meaningful change in policy."

Researchers at the Federal Reserve Bank of San Francisco, in a paper Monday, said there's a "significant" chance the economy will tip back into recession in the next two years. However, such a backslide is unlikely to happen in the next few months, the researchers said.

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