Fed Holds Off On New Action To Spur Growth

Aug 1, 2012
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Federal Reserve policymakers said today that the pace of economic growth in the U.S. is slowing and that unemployment is likely to fall only gradually. But after wrapping up a two-day meeting, they stopped short of taking any new action to spur growth. As NPR's Jim Zarroli reports, the Fed's cautious response sent stock prices down.

JIM ZARROLI, BYLINE: The Fed released a statement saying economic activity has decelerated during the first half of this year. Household spending is down, and the housing sector remains depressed despite some signs of improvement. But Dean Croushore, professor of economics at the University of Richmond, says the Fed is still hedging its bets, waiting to see just how bad the downturn really becomes.

DR. DEAN CROUSHORE: If Europe continues to falter and we start to see bigger problems in the labor markets and so on, then I think there might be might cause for action. But right now, I don't think they're convinced about that.

ZARROLI: Fed officials did say they will closely monitor incoming economic data and are ready to act if the economy deteriorates further. For now, they also said they will continue some of the steps they've been taking to stimulate growth. One is the program dubbed Operation Twist, which involves selling of short-term treasuries and replacing them with longer-term securities. It's a way of driving down long-term interest rates, which lowers mortgage rates and helps the housing market. Fed officials also reiterated their pledge to keep rates low through the end of 2014. But former Fed economist Joseph Gagnon said Fed officials stopped short of doing anything more.

JOSEPH GAGNON: I've been surprised all along they have been so timid given three years in a row which their forecasts have been disappointing, and I don't quite understand it.

ZARROLI: Gagnon says at this point, the Fed has a dwindling number of options. It can promise to keep rates low for an even longer period of time or it can buy up more mortgage-backed securities as a way of bringing down interest rates even further. He says that might help a bit, but interest rates are already at historic lows and businesses are still reluctant to hire and invest. Buying up securities would also add more to the Fed's balance sheet, which has already expanded considerably since the 2008 financial crisis. Gagnon says the Fed may simply be reluctant to take actions like these until they're absolutely necessary.

GAGNON: I mean, I think they should do that and maybe they think so too. It does expose them in the sense that after that, if that doesn't work, they really are running out of ammunition.

ZARROLI: Today's decision means that Fed action will probably be deferred until its next meeting in September at the earliest. That would be less than two months before the November election - too late to affect the campaign much. In the meantime, Fed officials will be watching and waiting to see just how much the economy has slowed before taking any action. Jim Zarroli, NPR News. Transcript provided by NPR, Copyright NPR.