The Fed says the deck chairs need rearranging

Fed Will Keep Holdings Stable in Bid to Boost Growth (Update1)
By Scott Lanman


Aug. 10 (Bloomberg) -- Federal Reserve officials made their first attempt to bolster the economy in more than a year, saying they will maintain their holdings of securities to stop money from draining out of the financial system.

The central bank will reinvest principal payments on mortgage assets it holds into long-term Treasuries after judging that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in a statement after meeting today in Washington.

Treasuries surged and stocks pared losses as some investors anticipated that today’s move opens the door to a renewed round of asset purchases should the economy slow further. Chairman Ben S. Bernanke told Congress last month that the Fed was “prepared to take further policy actions as needed” to support an economy hobbled by 9.5 percent unemployment.

“With the economy slowing and inflation low, it is too early to pull in the horns,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “The last thing they want is a smaller balance sheet.”

With growth slowing in the second quarter and company job gains in July falling short of estimates, today’s step signals that risks of a downturn have increased enough for the Fed to delay its exit from unprecedented stimulus. The Fed retained a commitment to keep its benchmark interest rate close to zero for an “extended period.” ..........(more)

The complete piece is at: http://noir.bloomberg.com/apps/news?pid=20601087&sid=aE6i3XP5S5OQ&pos=1

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