US Federal Reserve confirmed fears of a marked slowdown in the world’s biggest economy yesterday as it made its first step towards extending its emergency monetary policy regime in a significant policy shift.
The central bank said it would reinvest proceeds from its investments in mortgage-backed securities to buy longer-term government debt in a bid to help the faltering economy by keeping mortgage and corporate loan rates lower.
The move, dubbed a “light” version of quantitative easing (QE) by economists, means the Fed will pump the estimated $200m to $300m proceeds from its first $1.2 trillion QE cycle into Treasury bonds, while maintaining its balance sheet at close to its present $2.06 trillion, rather than gradually allowing it to run down.
The decision is an abrupt U-turn by Fed chairman Ben Bernanke, who just last month said he was not planning specific new measures to support the economy. But yesterday’s statement forecast a more gloomy outlook for the economy with Fed officials saying the “pace of recovery in output and employment has slowed in recent months”. When it last met in June, it said the recovery was “proceeding” at a “moderate pace”. The Fed also reassured markets that it would keep rates on hold at 0 per cent to 0.25 per cent for an “extended period”.
Capital Economics analyst Paul Ashworth said the policy change was a “largely symbolic gesture, designed to reassure markets.
The Dow Jones, which fell by 100 points earlier, narrowed its loss within minutes of the committee’s statement eventually closing 54.5 points lower at 10,644.25. The Fed’s move came as official data showed US business productivity fell for the first time in one and a half years in the second quarter.