WASHINGTON More worried about the strength of the economic recovery, the Federal Reserve took a small step Tuesday to give it a boost.
Wrapping up a one-day meeting, the Fed said it will use the proceeds from its investments in mortgage bonds to buy government debt. That should help lower interest rates on mortgages and corporate debt, but it wont likely have a dramatic impact on stimulating growth, economists say.
Delivering a more downbeat assessment of the recovery, the Fed now believes economic growth will be more modest than it had anticipated at its late June meeting. Citing subdued inflation, the Fed said it would keep its target for a key interest rate at zero to 0.25 percent for a extended period.
The focus again on energizing the recovery is a shift from earlier this year, when the Fed was starting to lay out its exit strategy for eventually boosting interest rates.
Economists said the move to buy government debt on a small scale about $10 billion a month along with the other options at the Feds disposal, will have only a marginal impact on boosting economic growth.
With interest rates at record lows, Congress has more power than the Fed to stimulate the recovery, economists say. But they differ on whether the best action is through short-term government spending or tax cuts, or some combination of the two.
The Feds remaining tools wont be very effective unless we see a severe deterioration in financial market conditions, said David Jones, head of DMJ Advisors, a Denver-based consulting firm and the author of several books on the Fed.
Still, investors reacted positively to the statement. Stocks that were down sharply before the announcement made up some lost ground. The Dow Jones industrial average, down about 102 points just before the Fed decision, was down about 27 points a short time later. However, the market was likely to fluctuate, as it usually does while investors pore over the Feds statement.
They seem to have quite a handle on whats going on, which is what you want them to do, said Robert Pavlik, chief market strategist at Banyan Partners LLC in New York.
Treasury prices rose slightly as investors were pleased by the Feds plan to buy government debt, which would reduce the amount of Treasury securities in the market. The yield on the Treasurys 10-year note, which moves in the opposite direction from its price, fell to 2.77 percent from 2.82 percent just before the announcement.
Rates fell, in part, because the Fed said it would use the proceeds its earning on mortgage bonds to buy two-year and 10-year Treasurys, and that it would buy an equal amount of government debt as existing bonds mature. The net effect is to keep its $2.3 trillion balance sheet steady, while shifting its holdings into more government debt.
Economists estimate about $10 billion a month would be available to buy the government debt. The Fed said it expects to start buying the government debt Aug. 17. Details about the amounts of each operation will be published on Wednesday.
Economists are skeptical that cheaper credit or even more government aid will get Americans shopping more and businesses to hire.
They also say some jobs in construction and other housing-related fields, and in manufacturing, will never return to pre-recession levels while the economy makes a structural shift.
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, dissented for the fifth consecutive meeting. Hoenig believes the economy is recovering modestly and didnt need the extra help. He raised concerns about the Feds decision to buy government debt again and he continues to object to the Feds pledge to keep rates at record lows for an extended period.
The Fed said the recoverys pace had slowed in recent months, a downgrade from June when it observed that the recovery was proceeding. The Fed also said employment has slowed, too. That also was a more pessimistic assessment from June, when the Fed said that the labor market was improving.
High unemployment, lackluster income growth, sagging home values and tight credit are all restraining the pace of consumer spending, usually a major source of powering the economy, the Fed also said. Businesses, meanwhile, are reluctant to hire and commercial real estate is weak, other drags on the recovery.
AP Business Writers Martin Crutsinger in Washington, David Pitt in Des Moines, and Bernard Condon in New York contributed to this report.