Economic Slowdown: Federal Reserve Vows to Help

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."

Fed Will Buy Government Debt

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."

Double Dip Recession Possible?

Economists say that the longer the nation remains in a "traffic jam" of slow hiring and reluctance to spend, the greater the chance of a double-dip recession.

The release of July's jobs report last week showed the nation shedding 131,000 jobs. On top of that, researchers at the San Francisco Federal Reserve released a paper Monday saying that there was a significant chance the economy could fall into another recession in the next two years.

That slowing recovery has some economists worried that the nation is headed for a double-dip recession.

The last double-dip recession was in the early 1980s. The nation suffered a recession in 1980, recovered and then went back into a recession in the second half of 1981.

"A double dip is certainly possible and even more probable than we'd like to admit at this stage of the game," Swonk said.