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FOMC Keeps Interest Rates Unchanged, to Reinvest MBS Proceeds

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Signs of an economic recovery have cooled, the Federal Reserve said Tuesday. But the Federal Open Market Committee plans to reinvest proceeds of maturing mortgage-backed securities held by the US central bank into long-term Treasurys in a move to stave off contraction of the nation's balance sheet. "The pace of recovery in output and employment has slowed in recent months," the FOMC said. The committee maintained the fed funds rate at 0%-0.25% and said "inflation is likely to be subdued for some time," as measures continue to trend lower. Still, the Fed expects "a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated." The FOMC said it will continue to "employ its policy tools as necessary to promote economic recovery and price stability," but many wonder what more the Fed can do. With the ZIRP in place for a year-and-a-half now and billions of stimulus money failing to kick-start legitimate recovery, how many tools are left in the shed? Is the once seemingly unreal but now looming possibility of deflation the final alternative? Dropping the rate to 0% in December 2008 was supposed to spur increased lending by banks. But, once again on Tuesday, the FOMC said "bank lending has continued to contract." Members also said housing starts remain at a depressed level and nonresidential investment continues to be weak. Write to Jason Philyaw.

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