WASHINGTON — As recently as two months ago, the Federal Reserve sounded optimistic about the economic recovery. Now, the central bank is clearly more worried, and economists say there’s not much more it can do to help.
The Fed said Tuesday it would spend a relatively small amount of money — about $10 billion a month, economists estimate — buying government debt. The move is designed to drive interest rates on mortgages and corporate borrowing at least a little lower and help the economy grow faster.
In a statement after a one-day meeting, the Fed said the pace of the recovery “has slowed in recent months.” After its last meeting in late June, the Fed was rosier, saying the recovery was “proceeding” and the job market improving.
The decision to buy government debt, using proceeds from Fed investments in mortgage bonds, was a shift from earlier this year, when the Fed was laying out plans to roll back some of the measures it took during the financial crisis.
At that time, the Fed was also preparing a strategy to begin raising interest rates again, a step taken to keep a growing economy from overheating. Now, though, the Fed has decided to keep its benchmark interest rate near zero.
“I don’t think they are going to raise interest rates until it is very clear that unemployment is moving definitively lower, and that doesn’t look likely until late 2011,” said Mark Zandi, chief economist at Moody’s Analytics.
Economists pointed out that buying $10 billion of government debt in a $14 trillion economy is a relatively small move, and they said they did not expect it to have a dramatic impact.
“The Fed talked loudly but carried a small stick,” said Joel Naroff, president of Naroff Economic Advisors.
He said that while the financial system has the money to lend, banks are unwilling or unable to find suitable loans to make. Until they do, he said, “the recovery will be softer than anyone hoped for, and there may be little the Fed can do about it.”
With interest rates so low, economists note, Congress has more power than the Fed to stimulate the economy. But with midterm elections nearing, lawmakers are divided on whether the best move is short-term government spending, tax cuts or some combination.
Investors reacted positively to the Fed’s statement anyway. Stocks were down sharply before the announcement but made up ground after it was announced at midafternoon. The Dow Jones industrial average finished down about 55 points.
“The news is positive but not meaningful,” said John Merrill, chief investment officer of Tanglewood Wealth Management in Houston. “The money is a pittance.”
The central bank said it expects to start buying the government debt Aug. 17 and planned to publish details today.
The Fed’s changing view on the economy
Federal Reserve members sounded more alarm about the strength of the economic recovery, taking a more active stance on giving things a boost than in recent months, according to minutes of Tuesday’s meeting. A comparison of the Fed’s statements from its last meeting June 22-23 and now:
RECOVERY SPEED
June: “The economic recovery is proceeding and . . . the labor market is improving gradually.”
August: “The pace of recovery in output and employment has slowed in recent months.”
ECONOMIC CONDITIONS
June: “Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth and tighter credit.”
August: “Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit.”
HOUSING
June: “Housing starts remain at a depressed level.”
August: “Housing starts remain at a depressed level.”
INTEREST RATES
April: Leaves federal funds rate target unchanged at a record low of zero to 0.25 percent, where it has been since December 2008, and repeats pledge to keep rates “exceptionally low” for “an extended period.”
August: Leaves federal funds rate target unchanged and once again repeats pledge to keep rates “exceptionally low” for “an extended period.”
