Fed, Citing Slowdown, to Buy U.S. Debt

WASHINGTON — Acknowledging that the recovery has slowed, the Federal Reserve on Tuesday announced that it would use the proceeds from its huge mortgage-bond portfolio to buy long-term Treasury securities.

By buying government debt, the Fed is taking an unmistakable step to maintain the large amount of money that it pumped into the economy, starting in 2007, to prop up the financial and housing markets.

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.”

On Wall Street, shares regained some lost ground after the announcement.

Bruce McCain, the chief investment strategist at Key Private Bank, said Fed “steered the middle ground,” with the decision, while acknowledging the weakness that the market has been seeing in the economy.

“The fact that they committed to reinvesting was a little bit more than some had been looking for,” Mr. McCain said, “but at the same time it basically holds constant the size of their balance sheet.”

“Given the uncertainty, hopefully the middle ground calms nerves and keeps people confident enough to go ahead and spend the money that they have in productive ways,” he said, adding that the position suggests that the Fed does not expect an “enormous wave of economic weakness.”

The Federal Reserve Bank of New York, which runs the trading desk through which the Fed conducts open market operations, was expected to issue details on the transactions later in the afternoon on Tuesday.

At its last meeting, in June, the committee downgraded its outlook and openly discussed the prospect of deflation — a declining spiral of demand, prices and wages — but cautioned that it was only likely to act if the situation took a serious turn for the worse.

Since that meeting, the Fed chairman, Ben S. Bernanke, and other Fed officials, had used cautious language in describing the state of the economy and the likelihood of new action by the central bank. In testimony before Congress last month, and at a speech in Charleston, S.C., last week, Mr. Bernanke said the economic recovery was continuing.

The Federal Open Market Committee’s vote on Tuesday was 9 to 1. The dissenter was Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City.

Mr. Hoenig has dissented frequently since the start of the year, asserting that the Fed’s stated policy of maintaining an “exceptionally low” level of the fed funds rate for an “extended period” was “no longer warranted.”

He dissented again on Tuesday, both on the extended-period language and on the decision to reinvest the mortgage-bond proceeds.

“Given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve’s holdings of longer-term securities at their current level was required to support a return to the committee’s policy objectives,” the Fed said in a statement. Read more at finance.yahoo.com