Fed takes small step to boost economy

The Federal Reserve says it will use the proceeds from its investments in mortgage bonds to buy government debt on a small scale, according to The Washington Post. The decision, which was reached when the Fed met Aug. 10 to discuss the economy, could signal the Fed sees the recovery weakening and is ready to aggressively take action to bolster the economy.

Economists say the Fed's plan could help decrease long-term rates on mortgages and corporate debt but likely won't significantly stimulate growth.

The Fed's view has changed since its late June meeting. It says recovery and employment have slowed in recent months and it expects "more modest" economic growth; in June, it said the recovery was "proceeding" and the labor market was improving. The Fed also cites "subdued" inflation, keeping its target for a key interest rate at zero to 0.25 percent for an "extended period."

The Fed reports consumer spending is being held back by high unemployment, slow income growth, tight credit and sagging home values. Additionally, companies are hesitant to hire and commercial real estate is weak.

Some economists believe the Fed needs additional help from Congress if they want to improve the economy, and others doubt easier credit or more government aid will persuade people to shop more or hire more. Some believe there has been a structural shift in the economy and some jobs, such as construction, will never return to pre-recession levels.

In 2009 and early 2010, the Fed bought $1.25 trillion in mortgage securities, $175 billion in mortgage debt from Fannie Mae and Freddie Mac, and $300 billion in government debt as part of two crisis-era programs.

Date : 8/11/2010