Fed moves closer to new action to help economy

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The Federal Reserve, meeting for the last time before an election that hinges on the weak economy, edged closer Tuesday to jumping in to help and suggested it’s more worried about prices falling than rising.

The central bank gathered as new figures showed some improvement in home construction. But those same figures showed the pace of building would have to double to contribute much to job growth, underscoring the dire state of the housing market.

The Fed announced no new steps. It signaled that for now it will stand back and see whether the economy can heal on its own.

But a change in its policy language, which is examined with precision by the financial world, showed it was moving closer to acting. The Fed said it was “prepared to provide additional accommodation,” where before it said it would “employ its tools as necessary.” It also concluded that economic growth had slowed over the summer.

That’s all too clear to the nearly 15 million Americans out of work, some of whom scoffed at news earlier this week that the recession had technically ended in June of last year.

Voters will go to the polls Nov. 2 for midterm elections, and polls have suggested two things: They’re worried about the economy more than any other issue. And they’re ready to punish Democrats.

President Barack Obama’s Democrats are at risk of losing control of the House and perhaps the Senate as well. Both parties agree there’s little the president and his party can do to change voters’ attitudes before the election.

Obama acknowledged the economic hardships many Americans are enduring, saying Monday: “If you’re out of work right now, the only thing that you’re going to be hearing is, when do I get a job? If you’re about to lose your home, all you’re thinking about is, when can I get my home?”

The central bank’s statement Tuesday didn’t explicitly mention deflation. But it said inflation measures are “somewhat below” what’s desirable for the economy. Some economists have raised fears about a deflationary spiral – a widespread drop in wages, prices of goods and services and the value of stocks and homes.

“They are more worried about the economy and deflation than I thought they would be,” Sung Won Sohn, an economist at the Martin Smith School of Business at California State University, said of Fed officials.

Bond prices jumped after the Fed news as traders surmised that the Fed might eventually buy more Treasury bonds to try to drive down long-term rates. The yield on the 10-year Treasury note sank to 2.58 percent from 2.70 percent the day before. Stocks rallied briefly on the news but ended mainly lower.

Home construction rose last month and applications for building permits also grew, the government said Tuesday. But the building of homes and apartments is still running at an annual pace of just 598,000, a far cry from the robust housing-market activity it takes to generate many jobs.

At Tuesday’s meeting, the Fed once again left a key short-term interest rate near zero, where it has been since December 2008. It also repeated its pledge to hold rates at those ultra-low levels for an “extended period.”

If the economy keeps losing momentum, the Fed will be likelier to act when it meets again, either at its meeting Nov. 2-3 or its last regularly scheduled session of the year on Dec. 14.

If the Fed does act, Chairman Ben Bernanke last month indicated a preference to buy large amounts of government debt – a move to lower rates on mortgages, corporate loans and other debt and get people and businesses to spend more money.

Unconventional steps like that, known in economic circles as “quantitative easing,” have helped the Fed’s balance sheet balloon to $2.3 trillion, nearly triple its level before the financial crisis.

Even if the Fed made such a move, economists don’t think it would help much. Already low interest rates haven’t managed to get Americans to spend much more. Companies and people alike have remained cautious as they rebuild their finances and pare debt.

At its last meeting in August, the Fed took a small step: It decided to use proceeds from its huge mortgage portfolio and buy government debt. That nudged down mortgage rates. But it would take a bigger buying binge to push rates down further.

Economic growth slowed in the second quarter, advancing at a pace of just 1.6 percent, compared with 3.7 percent growth in the first three months of the year. Growth in the third quarter is expected to be similarly weak. That raises the likelihood that the unemployment rate, already high at 9.6 percent, could climb even higher in the months ahead.

One Response to Fed moves closer to new action to help economy

  1. I moved from Denver to take a job in Colorado Springs, I have been at my position less than a year. At our last company meeting about three weeks ago, we were all told we would need to take pay cuts. This was an effort to keep the entire staff in tacked. This pay cut accounted for 30% of our wages, and now many of us can not afford to keep working here. I think our situation is not uncommon for today’s business climate. It seems the Government has help those who have pillaged, and taken advantage of the system over the last decades. Not the people near the bottom of the employment pile in need of the most help. To say the recession is over is a joke, it seems that every day grows worse than the day before. Yet all the bankers on wall Street are getting back to those millions in bonuses and such, this is going the be a long, poor winter.

    trent
    September 27, 2010 at 12:13 pm