Fed vows to expand efforts on economy
WASHINGTON — Conceding that the economy is still spiraling downward on most fronts, the Federal Reserve signaled Wednesday that it would expand its use of unconventional measures to directly prop up lending for mortgages, consumer loans and businesses.
"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the Fed said in its statement.
The Federal Reserve already has been buying mortgage-backed securities, and it said Wednesday in its statement that it would expand intervention as needed. The committee also served notice that it would purchase longer-term Treasury bonds, a move that would drive down long-term interest rates of all types.
It expressed its most pointed concern so far that deflation could be a problem and said it saw "some risk" that price inflation remained uncomfortably low.
One month after the central bank took the historic step of lowering its benchmark interest rate virtually to zero, policymakers pledged Wednesday to keep it there "for some time" and to use "all available tools" for reviving the economy in other ways.
House Democrats passed on Wednesday an $825 billion, two-year stimulus passage that included temporary tax cuts and money for roads and bridges; renewable energy programs; health care; and more than $150 billion for education programs that range from Head Start for small children to Pell Grants for college students.
The Treasury is mapping out a strategy for using the second $350 billion that Congress recently freed up for the Troubled Asset Relief Program, or TARP, that was aimed at infusing fresh capital into the banking system.
Analysts estimate that the economy contracted by more than 5 percent in the fourth quarter last year, one of the sharpest quarterly drops in decades. Employers eliminated 2 million jobs from September through December.
Fed officials expect the economy to continue shrinking through at least six months of this year, and then to begin a sluggish recovery.
"Industrial production, housing starts and employment have continued to decline steeply, as consumers and businesses have cut back spending," the Fed statement said. "Furthermore, global demand appears to be slowing significantly."
But it noted that conditions in some financial markets had improved, in part reflecting government bailout efforts. "Nevertheless, credit conditions for households and firms remain extremely tight," the statement said instant payday loan.
Because the Fed cannot reduce its overnight lending rate below zero, officials have established an array of specialized programs aimed at pouring money into particular segments of the credit markets.
In the next several weeks, the Fed expects to start a $200 billion program that would finance securities backed by consumer loans, including car loans and credit card debt. Earlier this month, the Fed started a program to buy $500 billion in mortgage-backed securities.
Since September, the central bank has used its authority to produce more than $1 trillion out of thin air, more than doubling the size of its balance sheet from about $900 billion in September to just over $2 trillion as of last week.
But Fed officials have acknowledged for weeks that the economy contracted sharply in the fourth quarter. Employers, who had been shedding about 80,000 jobs a month from January through August, eliminated an average of 500,000 jobs a month from September through December.
Traditionally, the Fed has tried to steer the overall economy almost entirely through the Federal Funds rate, the rate that banks charge each other for lending their overnight reserves to each other. But because banks remained highly reluctant to lend, even as the Fed lowered the overnight interest rate time after time, the central bank began establishing programs last fall in which it stepped in as a lender itself.
To push down interest rates on mortgages, the central bank began a program earlier this month to buy $500 billion in mortgage-backed securities issued by Fannie Mae, Freddie Mac and the federal agencies. Buying large volumes of a security pushes up its price in the market, which leads to lower yields or interest rates.
Thus far, the Fed has bought about $53 billion of the securities. But rates for the kind of traditional mortgages that Fannie and Freddie guarantee dropped sharply and stayed low as soon as the Fed announced plans for the program in late November.
Stuart Hoffman, chief economist at PNC Financial Services Group, took away this message from the Fed’s statement: "We’re going to throw all we have — including the kitchen sink — into supporting financial markets."
The Associated Press contributed to this story.
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