WASHINGTON — Officials at the Federal Reserve signaled on Tuesday for the first time that they were worried that the slow-moving economic recovery could be undermined by very low rates of inflation, and hinted strongly that it might resume buying vast amounts of government debt to spur the recovery. While the central bank’s Federal Open Market Committee did not take any new steps on interest rates, it communicated in unmistakable terms its concerns about the fragility of the economic recovery and a threat to stable prices. þþIt said that underlying inflation levels, which have hovered at about half the Fed’s 2 percent target rate, were “somewhat below those the committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.” þþThat was a departure from just six weeks ago when the committee commented that inflation measures had “trended lower in recent quarters.” The concern over low inflation has raised fears of deflation — a sustained drop in wages and prices. þþLast month, the Fed said it was “prepared to provide additional accommodation if needed” to support the recovery and get inflation back to normal. þþFor now, the Fed took no such action. It will continue to maintain its portfolio of securities by reinvesting the proceeds from its holdings of mortgage-related bonds to buy long-term Treasury debt, the tactic it announced on Aug. 10. That strategy was intended to prevent the possibility of a slight tightening of monetary policy that would have occurred as bonds held by the Fed were paid off and money was taken out of the economy. þþOn Tuesday the Fed’s policy-making committee did what most market analysts expected; it deferred the decision on whether it should begin a big new push to speed the recovery by creating money for large-scale purchases of Treasury securities, a strategy known as quantitative easing. Such easing would push down long-term interest rates, which could help reduce the already low cost of borrowing. þþ“They can’t say unequivocally that we’re going into another recession, but they certainly can’t promise a rapid recovery,” said Michael D. Bordo, an economist at Rutgers University and an authority on monetary policy. “They’re in this limbo state.” þþMoments after the central bank announced its decision, stock prices, which had been flat most of the day, rose with the Dow increasing as much as 80 points. But some investors wanted the Fed to take bolder steps and the rally fizzled. The Dow ended the day up 7.41 points. þþLast March, the Fed completed a big round of quantitative easing after buying $1.4 trillion in mortgage-related securities and $300 billion in Treasury debt in the space of 15 months. þþIn a speech on Aug. 27, at the Fed’s annual symposium in Jackson Hole, Wyo., the Fed chairman, Ben S. Bernanke, left no doubt that a big new round of quantitative easing was one option if the recovery needed a lift. Other options include signaling that the Fed intends to keep rates low for even longer than markets already expect, or lowering the interest paid on reserves that banks hold at the Fed — a step that could encourage banks to lend more. þþ“The committee put a marker down in August,” said Ellen E. Meade, an economist at American University who studies Fed decision-making. “They want to keep it out there, but they don’t want to use it just yet. They opened the door on quantitative easing, and they’re keeping it open until they’re sure they need to close it.” þþAngel Gurría, secretary-general of the Organization for Economic Cooperation and Development, said, “The Fed needs to be vigilant but doesn’t necessarily need to restart the program at this stage.” þþHe added: “We need to know if this is a short-term weakness or if it has longer staying power. We believe it is more likely that the weakness is temporary and that we will probably recover from this recent bump. It’s a pothole, not a ditch.” þþThe committee began its meeting on Tuesday at 8 a.m., an hour earlier than usual, to leave plenty of time for discussion in an acknowledgment of the Fed’s uncertainty. þþThough the recession officially ended in June 2009, as the academic arbiters of the nation’s business cycles announced Monday, the 9.6 percent unemployment rate shows no signs of improvement. þþ“On balance, has the economy been worsening since Jackson Hole? Probably not,” Professor Meade said. “Have there been a few signs that things have gotten better? Maybe. The urgency that seemed to be on the margins in August may have lessened, and that’s the argument for waiting.” þþWhile the Fed tries to operate outside of political cycles, the fact that this was the last scheduled policy meeting before the midterm elections cannot have escaped its members’ notice. The committee is next scheduled to gather for a two-day meeting on Nov. 2 — Election Day — and Nov. 3. þþ“All else equal, if they can postpone action until after the midterm election, they would prefer to do that,” said Jonathan H. Wright, an economist at Johns Hopkins University and a former Fed researcher. þþThere is a growing expectation among Wall Street economists that the Fed will resume quantitative easing later this year, either at the November meeting or at the committee’s final meeting this year, on Dec. 14. Of course, the forecasters have been known to err. þþ“I think there’s a big split within the committee,” Professor Wright said. “To get the F.O.M.C. to really do any of the remaining options that they have open to them, it would take some really clear signal of the economic outlook worsening.” þþTo no one’s surprise, the Fed on Tuesday left the benchmark short-term interest rate — the federal funds rate, at which banks lend to each overnight — at near zero, its level since December 2008, and reiterated that the rate would likely remain “exceptionally low” for “an extended period,” the wording it has consistently used since March 2009. þþAnd equally expectedly, Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, was the lone dissenter in the committee’s 8 to 1 vote. He has objected at every committee meeting this year to the Fed’s language on keeping short rates low, and he also opposed the decision made in August to reinvest proceeds from mortgage-related securities in new purchases of government debt. þþThe Tuesday meeting was unusual in one respect. There were only nine officials voting, not the normal 12. That was because the Fed’s seven-member board of governors now has three vacancies, after the retirement of Donald L. Kohn on Sept. 1. þþPresident Obama has nominated three people to fill the seats, but the Senate has not yet confirmed them. Along with the seven governors, the committee includes the president of the Federal Reserve Bank of New York and a rotating group of four other regional Fed presidents. þ
Source: NY Times
