Fed to Buy Government Debt; Says the Recovery Has ‘Slowed’

Acknowledging that "the pace of recovery in output and employment has slowed in recent months," the Federal Reserve on Tuesday announced that it would use the proceeds from its huge mortgage-bond portfolio to buy long-term Treasury securities.

The action was a small step in dollar terms but the clearest indication yet that officials at the central bank had become alarmed about new indications that the recovery had stalled and could even, in the view of some Fed officials, turn into deflation, a spiraling decline in demand, wages and prices


While the central bank held off on taking more aggressive steps, like a new, huge round of asset purchases, it left open the possibility that additional easing of monetary policy could take place in the fall if the recovery were to continue to weaken.

The Fed’s new stance marked the completion of a turnabout from a few months ago, when officials were discussing when and how to eventually raise interest rates and gradually shrink the $2.3 trillion balance sheet the Fed amassed through its response to the 2008 financial crisis.

In buying new Treasury securities to the tune of about $10 billion a month — a small fraction of the roughly $700 billion in Treasury debt sitting on the Fed’s balance sheet — the Fed will not let the balance sheet shrink for the time being.

More than anything, the announcement was a signal to the markets that the Fed was concerned about the pace of the recovery, and had shifted from its more optimistic assessment earlier this year, that economic growth was sufficiently strong to begin thinking about how to gradually return to normal monetary policy.

For now, the Fed is saying, normal is a ways off. “Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months,” the Fed said in a statement.

The Fed bought $1.25 trillion in mortgage-backed securities, and another $200 billion in debts owed by government-sponsored enterprises, primarily Fannie Mae and Freddie Mac, and completed the purchases in March. The Fed had planned to allow the size of that portfolio to shrink gradually over time as the debts matured or were prepaid. Instead, the Fed will reinvest the principal payments in longer-term Treasury securities.

The central bank said it would continue to roll over its holdings of other Treasury securities as they mature.

In its announcement, the Fed also left unchanged its benchmark short-term interest rate — the federal funds rate, the rate at which banks borrow from each other overnight — at zero to 0.25 percent, the level it has been at since December 2008.

In a new qualification to its previous statements, the committee said it still expected a “gradual return” to normal economic conditions, “although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”