Fed Hints at Economic Stimulus

By:: Peter King | September 22, 2010

The Federal Reserve is hinting it may soon take new steps to inject more cash into the economy if the weak recovery falters and deflation becomes a threat.

In a statement following its September meeting, the Fed’s Open Market Committee said it is “prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

Statements like that generally mean the Fed is signaling markets that it may ease monetary policy in the near future to boost economic activity. That could mean that mortgage rates will continue to remain at historic lows or even decline for some time to come, although credit will likely remain hard to come by as long as lenders remain uncertain about the stability of home values.

Mortgage rates dropped steeply after the Fed took aggressive action in Spring 2009 to free up credit, announcing it would purchase $1.25 trillion in mortgage-backed securities and $300 million in other debt over the coming year. However, any further actions by the Fed at this point are likely to be far more modest in scope.

The Fed said that “pace of recovery in output and employment has slowed in recent months,” suggesting concerns with the direction of the recovery. It said that inflation remains below the level deemed to promote maximum employment and price stability and “is likely to remain subdued for some time” before returning to levels consistent with those goals.

The Fed’s announcement comes the day after the National Bureau of Economic Research reported that the worst recession since the Great Depression officially ended in June 2009. However, the end of a recession as defined by economists only refers to an increase in gross domestic product, even minimally, and does not necessarily reflect gains in employment, payrolls, consumer spending or other economic measures more immediately apparent to the general population.

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