Worried About Recovery, Fed To Buy U.S. Debt The Federal Reserve 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.

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

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The Federal Reserve is concerned that the economy is slowing down, so it's taking some steps to prevent that. Federal officials have decided to buy U.S. Treasury securities. Essentially the Fed is loaning money to the U.S. government. This keeps money flowing into the economy. The new strategy is being introduced after a disappointing jobs report last week raised new doubts about the strength of the economy. NPR's Jim Zarroli reports.

JIM ZARROLI: Fed officials leave no doubt they are growing more concerned about the weakening economy. They say high unemployment is constraining household spending, housing is depressed, bank lending continues to contract. Bernard Baumohl of the Economic Outlook Group says it's an economy that is still struggling.

Mr. BERNARD BAUMOHL (Economic Outlook Group): It's growing but it's very tepid, very anemic kind of growth. And the Fed knows it needs to do something more.

ZARROLI: With interest rates already at historically low levels, the Fed's options are limited. And the financial markets were rife with speculation before the meeting about what steps the Fed would take.

The new Fed strategy is a moderate one. In difficult times like these, the Fed typically buys securities such as mortgage bonds and Treasury bills. Former Federal Reserve Governor Randall Kroszner says it's a way of pouring money into the financial system.

Mr. RANDALL KROSZNER (Former Federal Reserve governor): 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.

ZARROLI: Since the financial crisis erupted two years ago, the Fed has been steadily buying more and more securities. And it has about $2 trillion worth of such assets on its balance sheet. Now 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 the economy. But he says it will send a message to the financial markets.

Mr. KROSZNER: It's much more about expectations. It's much more about the Fed's readiness to provide support if the economy softens further. And I think 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.

ZARROLI: 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 down the road. But Kroszner says that's not really a big worry for the Fed right now.

Mr. KROSZNER: I think in the short to intermediate run, it's very hard to see any inflation pressures. Inflation expectations are low. There's no wage pressure. Prices are basically flat, and even in the last few months falling a little bit.

ZARROLI: 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 a political climate so divided in Washington, hopes for any more stimulus spending seem faint.

The Fed still has some options it can pursue - like stepping up its purchases of securities. And as the months drag on and the recovery remains so weak, it will be forced to consider new strategies to get the economy moving.

Jim Zarroli, NPR News, New York.

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