The Fed noted that high unemployment, modest income growth, lower housing wealth and tight credit were holding back household spending. Meanwhile, lending by banks "has continued to contract," the Fed said, while construction remains weak and employers remain reluctant to increase payrolls.
The Federal Reserve, facing an economic recovery that it termed "more modest" than anticipated, said Tuesday it will stop shrinking its huge portfolio of securities by reinvesting the proceeds of maturing mortgages in U.S. Treasury debt. The Fed move is largely symbolic and is unlikely to stimulate the economy significantly. But the shift in the management of its portfolio—and an accompanying statement—underscored Fed officials’ concern about the vigor of the economic recovery. It also opens the door for bigger purchases of Treasurys or other securities should the economy falter or the risk of deflation grow, though the hurdle for such action remains high. Downgrading its assessment of the economy, the policy-making Federal Open Market Committee said the recovery "has slowed in recent months," and that the "pace of economic recovery is likely to be more modest in the near term than had been anticipated." The committee repeated its commitment to keep its target for the federal funds rate, at which banks lend to each other overnight, at "exceptionally low levels" for an "extended period."
By Sudeep Reddy, August 11, 2010 WSJ
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