Worried About Recovery, Fed To Buy U.S. Debt

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The Federal Reserve is taking new steps aimed at keeping the U.S. economy from slowing any further.

Officials have decided that the central bank will buy U.S. Treasury securities as part of an effort to keep money flowing into the financial system. The strategy was unveiled days after another disappointing jobs report raised new doubts about the strength of the economy.

Officials leave no doubt that they are growing more concerned about the weakening economy. They say high unemployment is constraining household spending, housing is depressed, and bank lending continues to contract.

"It's growing, but it's a very tepid, very anemic kind of growth," says Bernard Baumohl of the Economic Outlook Group. "The Fed knows it needs to do something more."

With interest rates already at historic lows, the Fed's options are limited. The financial markets were rife with speculation about what steps the Fed would take.

The new strategy is a moderate one. In difficult times like these, the Fed typically buys securities like mortgage bonds and Treasury bills.

Former Federal Reserve Governor Randall Kroszner says it's a way of pouring money into the financial system.

"That helps to make credit conditions a little bit easier, and hopefully provide a little bit more support for housing markets, a little bit more support for consumption for investment," Kroszner adds.

Since the financial crisis erupted two years ago, the Fed has been steadily buying more and more securities. And it now has about $2 trillion worth of such assets on its balance sheet.

The Fed says it will take the money it makes from the sale of mortgage assets and reinvest it into Treasury bills.

The amount of money involved is not huge, and Kroszner says this shift in strategy by itself is unlikely to have a huge impact on economic activity. But he says it will send a message to the financial markets.

"It's much more about expectations," Kroszner adds. "It's much more about the Fed's readiness to provide support if the economy softens further. That is the key thing — that the Fed is taking a step to try to bolster confidence that the Fed can and will act if the economy worsens appreciably."

By pouring so much money into the financial system, the Fed is pursuing a strategy that still makes some investors nervous because it could lead to higher inflation.

"In the short to immediate run, it's very hard to see any inflation pressures," Kroszner says. "Inflation expectations are low. There's no wage pressure. Prices are flat and, even in the last few weeks, falling a little bit."

Kroszner says that gives the Fed some room to act. And the pressure on Federal Reserve officials to do something is growing.

Friday's disappointing jobs report was only the latest piece of evidence of how weak the economy is. With the political climate so divided in Washington, hopes for anymore stimulus spending seem faint.

The Fed still has some options it can pursue — like stepping up its purchases of securities.

As the months drag on and the recovery remains weak, it will be forced to consider new strategies to get the economy moving.



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