By Edmundo L.Andrews
WASHINGTON — Conceding that the economy is still spiraling downward on most fronts, the Federal Reserve signaled on 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 Wednesday in its statement.
The Fed has already been buying mortgage-backed securities and said in its statement that it would expand its 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.
And it expressed its most pointed concern so far that deflation could be a problem, saying 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, policy makers pledged on Wednesday to keep it there “for some time” and to use “all available tools” for reviving the economy in other ways.
Robert Gay, managing partner at Fenwick Advisers, said he was encouraged by the Fed’s hint that it would be willing to increase or extend its program to purchase mortgage-backed securities.
“That’s a very positive sign,” Mr. Gay said. “The Fed has become Bank USA. It is buying good but illiquid assets and taking them off balance sheets because (banks) can’t sell them in the open market.”
The two-day meeting came as House Democrats prepared to vote on 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 Department, meanwhile, 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 estimated that the economy contracted by more than 5 percent in the fourth quarter, one of the sharpest quarterly drops in decades. Employers eliminated two million jobs from September through December.
In their statement, policy makers said that the economy remained weak and would gradually recover later in the year.
“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.
“This is a view looking a little more darkly through the lens," said Stuart Hoffman, chief economist at PNC Financial. "It looks like the committee is looking at the data for the last six weeks and saying, ‘Well, it looks like things are even worse than we thought.’ ”
Because the Fed cannot reduce its overnight lending rate below zero, officials have created an array of specialized new 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 up $500 billion in mortgage-backed securities.
Since September, the central bank has used its authority to create 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 after the Fed lowered the overnight interest rate time after time, the central bank began creating new programs last fall in which it stepped in as a lender itself.
Last month, the central bank lowered the funds rate as far as it could, to a tight range between zero and a quarter of a percent. Since the Fed cannot push the rate below zero, it has been relying more intensively on its various new programs as a tool for pumping money straight into the economy.
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.
“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Fed said Wednesday in its statement.
The Fed has already been buying mortgage-backed securities and said in its statement that it would expand its 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.
And it expressed its most pointed concern so far that deflation could be a problem, saying 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, policy makers pledged on Wednesday to keep it there “for some time” and to use “all available tools” for reviving the economy in other ways.
Robert Gay, managing partner at Fenwick Advisers, said he was encouraged by the Fed’s hint that it would be willing to increase or extend its program to purchase mortgage-backed securities.
“That’s a very positive sign,” Mr. Gay said. “The Fed has become Bank USA. It is buying good but illiquid assets and taking them off balance sheets because (banks) can’t sell them in the open market.”
The two-day meeting came as House Democrats prepared to vote on 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 Department, meanwhile, 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 estimated that the economy contracted by more than 5 percent in the fourth quarter, one of the sharpest quarterly drops in decades. Employers eliminated two million jobs from September through December.
In their statement, policy makers said that the economy remained weak and would gradually recover later in the year.
“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.
“This is a view looking a little more darkly through the lens," said Stuart Hoffman, chief economist at PNC Financial. "It looks like the committee is looking at the data for the last six weeks and saying, ‘Well, it looks like things are even worse than we thought.’ ”
Because the Fed cannot reduce its overnight lending rate below zero, officials have created an array of specialized new 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 up $500 billion in mortgage-backed securities.
Since September, the central bank has used its authority to create 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 after the Fed lowered the overnight interest rate time after time, the central bank began creating new programs last fall in which it stepped in as a lender itself.
Last month, the central bank lowered the funds rate as far as it could, to a tight range between zero and a quarter of a percent. Since the Fed cannot push the rate below zero, it has been relying more intensively on its various new programs as a tool for pumping money straight into the economy.
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.
Wednesday’s policy vote was not unanimous. Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, voted against the decision. Mr. Lacker, the statement said, preferred to expand the monetary base by purchasing Treasury securities rather than through targeted credit programs.
Wednesday’s policy vote was not unanimous. Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, voted against the decision. Mr. Lacker, the statement said, preferred to expand the monetary base by purchasing Treasury securities rather than through targeted credit programs.
Jack Healy contributed reporting.
