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Fed to Use Mortgage Bond Proceeds to Reinvigorate Stalled Economy

The ""Federal Reserve's"":http://www.federalreserve.gov Tuesday policy meeting signaled a clear shift from earlier in the year, when officials professed stability and the central bank was crafting its exit strategy for stimulus programs.
[IMAGE] With economic growth in the United States slowing and the ""threat of a double-dip recession"":http://dsnews.comarticles/double-dip-recession-threatens-to-cut-another-20-off-home-prices-moodys-2010-08-09 spreading, the Federal Reserve board has decided to take the proceeds from its investments in mortgage bonds and pump new capital into the system.

Over the course of 2009 and early 2010, the Fed bought debt and mortgage securities from Fannie Mae, Freddie Mac, and Ginnie Mae as part of its efforts to lower mort-

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gage rates, amassing a portfolio of more than $1.5 trillion. As these bonds mature, the U.S. central bank plans to reinvest the principal payments in government debt, namely longer-term Treasuries, rather than shrinking its balance sheet.

The move is an indication of the Fed's heightened concerns over the state of the economy and the pause in growth recently.

Fed members said in a ""public statement"":http://www.federalreserve.gov/newsevents/press/monetary/20100810a.htm following their meeting, ""[T]he pace of recovery in output and employment has slowed in recent months. Household spending…remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.""

The committee again voted to keep the target range for its benchmark federal funds rate at 0 to 0.25 percent â€" a level it's maintained for more than a year and a half now. And again, the central bank reiterated its guarded outlook that economic conditions are likely to warrant ""exceptionally low levels"" of the federal funds rate ""for an extended period.""

""[T]he pace of economic recovery is likely to be more modest in the near term than had been anticipated,"" Fed officials said.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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