Economic Slowdown: Federal Reserve Vows to Help

Fed's decision to buy treasury bonds raises worries of a double dip recession.

ByABC News
August 10, 2010, 5:59 PM

Aug. 10, 2010 — -- The Federal Reserve's words made it clear today that it is concerned about the slowing pace of economic recovery.

"Today's statement was about as worried a statement as I've seen since, well, we were back in a recession," said Moody's chief economist Mark Zandi.

At the end of a one-day meeting of the Federal Open Market Committee, the Fed's top policymakers released a statement saying that new information "indicates that the pace of recovery in output and employment has slowed in recent months."

The Federal Reserve called the rate of recovery more modest than anticipated and announced that it will take steps to bolster the economy by buying government debt on a small scale.

Essentially, the Federal Reserve is reinvesting the $2.054 trillion that it deployed at the height of the recession to help the ailing mortgage market. Now, as those mortgages are paid off, the Fed will use that money to purchase U.S. Treasury bonds.

That's important, because treasury bonds are directly linked to the interest rates people pay on everything from mortgages to auto loans and college loans.

Fed Keeps Interest Rates Low

The action, while small, sends a big signal that the Fed sees economic recovery waning and that it is prepared to step in if necessary to keep recovery on track.

"The hope is that it will help, not only keep interest rates low, but may even bring them lower ... and make it easier for the banks to lend and consumers to borrow," said Diane Swonk, chief economist with Mesirow Financial.

The Federal Reserve's interest rate is already at a historic low of zero to 0.25 percent. The Fed said that it plans to keep the rate that low for an "extended period" in hopes that consumers and businesses spend.

It's a swift change from earlier this year when the Fed began to speak of an exit strategy, ways to slowly bring the rates back up. There was no talk of that today.

"Basically, they'd have to have blinders on ... to not see what's happened with unemployment in recent months, and we've seen an overall pace of expansion," Swonk said. "It's like being stuck in a traffic jam."