Fed takes small step to help boost recovery

August 11, 2010 at 12:00a.m.

Associated Press

WASHINGTON

More worried about the strength of the economic recovery, the Federal Reserve took a small step Tuesday to give it a boost.

Wrapping up a one-day meeting, the Fed said it will use the proceeds from its investments in mortgage bonds to buy government debt. That should help lower interest rates on mortgages and corporate debt, but it likely won’t have a dramatic impact on stimulating growth, economists say.

Delivering a more downbeat assessment of the recovery, the Fed now believes economic growth will be “more modest” than it had anticipated at its late-June meeting. Citing “subdued” inflation, the Fed said it would keep its target for a key interest rate at zero to 0.25 percent for an “extended period.”

The focus again on energizing the recovery is a shift from earlier this year, when the Fed was starting to lay out its exit strategy for eventually boosting interest rates.

Economists said the move to buy government debt on a small scale — about $10 billion a month — along with the other options at the Fed’s disposal, will have only a marginal impact on boosting economic growth.

With interest rates at record lows, Congress has more power than the Fed to stimulate the recovery, economists say. But they differ on whether the best action is through short-term government spending or tax cuts, or some combination of the two.

“The Fed’s remaining tools won’t be very effective unless we see a severe deterioration in financial- market conditions,” said David Jones, head of DMJ Advisors, a Denver-based consulting firm and the author of several books on the Fed.

Still, investors reacted positively to the statement. Stocks that were down sharply before the announcement made up some lost ground. The Dow Jones industrial average, down about 102 points just before the Fed decision, was down about 27 points a short time later. However, the market was likely to fluctuate, as it usually does while investors pore over the Fed’s statement.