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Fed stops short of action on weak economy

WASHINGTON — The Federal Reserve signaled Tuesday that it's worried about the weakness of the recovery and is ready to take further steps to boost the economy if needed.

Fed officials said they also are concerned that sluggish economic growth could prevent prices from rising at a healthy rate.

But at the end of its meeting, the Fed announced no new steps to try to rejuvenate the economy and drive down unemployment. Instead, it hinted that it's prepared to see if the economy can heal on its own.

In its statement, the Fed used the same language it did in August to sketch a downbeat view of the economy. It concluded that economic activity has slowed in recent months. And it warned that the pace of growth is likely to be "modest in the near term" — almost identical to the assessment it made a month ago.

But the Fed delivered a stronger signal that it would take new steps to lift the economy. The Fed said it is "prepared to provide additional accommodation." In its previous policy statements, the Fed didn't go that far. Instead, it had said it would "employ its policy tools as necessary."

The Fed made clear that given the economy's weakness, it's more concerned about prices falling than rising. It didn't use the word "deflation," but some economists have raised fears about the country sliding into a deflationary spiral. That's 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," said Sung Won Sohn, an economist at the Martin Smith School of Business at California State University.

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

Chairman Ben Bernanke last month indicated a preference to launch a program to buy large amounts of government debt. Such a move would be intended to lower already low rates on mortgages, corporate loans and other debt. The goal is to entice people and businesses to spend more, and thereby strengthen the economy and lower unemployment.

In economic circles, it's known as "quantitative easing." That's when the Fed takes unconventional steps, as it did during the financial crisis, to inject money into the economy. The Fed does this to lower long-term interest rates and help banks lend more. As a result, the Fed's balance sheet has ballooned to $2.3 trillion, nearly triple its level before the crisis.

Sohn predicted the Fed would start expanding its balance sheet before the end of the year.

"Even though they are not taking any action now, they have left the door open for additional action through buying Treasury bonds and mortgage-backed securities," he said.

Fed stops short of action on weak economy 09/21/10 [Last modified: Tuesday, September 21, 2010 8:40pm]
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