Fed Signals It May Take More Steps To Boost Economy

Federal Reserve policymakers signaled on Tuesday that they're prepared to take additional steps to support the economy if necessary. The Fed has been holding interest rates near zero, but growth hasn't returned and unemployment remains high.

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Federal Reserve officials said today that the U.S. inflation rate may actually have fallen too far. The comment came with a generally gloomy assessment of economic conditions at the end of the latest Fed meeting in Washington. But as NPR's Jim Zarroli reports, Fed officials stopped short of announcing any new measures to get the economy moving again.

JIM ZARROLI: The recession has officially ended, but growth remains weak, and the Fed has become more pessimistic about the strength of the recovery.

Today, the Fed issued a statement lamenting high unemployment, modest income growth, lower household wealth and tight credit. The pace of recovery, it said, has slowed.

Kenneth Kopecky is a professor of finance at Temple University and a former Fed economist.

Professor KENNETH KOPECKY (Professor of Finance, Temple University): Normally out of the bottom of a recession, growth does start to accelerate. What I see here is from the Fed's point of view, it doesn't see that trend yet.

ZARROLI: The statement went on to say that inflation is below levels consistent with full employment and price stability. For a central bank to complain that inflation is too low is unusual, and the remarks lent credence to those who worry about deflation, a dangerous decline in asset prices that many economists say would be hard to reverse.

The statement also asserted once again that the Fed is ready to take steps to get the economy moving again. Vincent Reinhart is an economist with the American Enterprise Institute.

Mr. VINCENT REINHART (Economist, American Enterprise Institute): What that's saying is they do believe they still have policy tools. So they can provide accommodation. And they are willing to do it if the outlook tells them that they should.

ZARROLI: But with interest rates at rock-bottom levels, the Fed's options are limited. The Fed is buying up U.S. Treasury bills to pump money into the economy, and it can step up those efforts. But Fed chairman Ben Bernanke has been reluctant to do that.

This effort to flood the system with money, a strategy sometimes called quantitative easing, is untested. One Fed official, Thomas Hoenig of the Kansas City Federal Reserve, is on record as opposing such a move, and Vince Reinhart says other Fed members believe it would set a bad precedent.

Mr. REINHART: It's a split committee, and Chairman Bernanke is trying to reconcile those very two different views.

ZARROLI: By embracing this strategy, Fed officials would also be sending a signal to the world that they have lost confidence in the economic recovery, says Temple's Kenneth Kopecky.

Prof. KOPECKY: It's a card that you don't want to play unless you actually have to play it because if you play it, you're basically going to be confirming bad expectations about the future for the U.S. economy.

ZARROLI: For now, the Fed is biding its time, but as the months drag on and the unemployment rate stays stubbornly high, Fed officials will be under more and more pressure to come up with answers, and they will have little choice but to try new strategies to push the economy forward.

Jim Zarroli, NPR News, New York.

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