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What Federal Reserve did to boost weak economic recovery

The Federal Reserve was set to let its $2 trillion pool of securities shrink. But it decided Tuesday to keep that amount steady – by buying Treasury bonds – as a way to spur economic recovery.

Frankie Dyon reacts in the Euro Dollar pit at the CME Group in Chicago Tuesday. The Federal Reserve on Tuesday took fresh steps to lower borrowing costs amid a softening economic recovery, announcing it would use proceeds from its maturing mortgage bonds to buy more government debt.

John Gress/Reuters

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The Federal Reserve's policy committee took action Tuesday designed to counter signs of weakness in the US economy.

With the Fed's short-term interest rate already set near zero percent, purchasing securities are one of the few tools by which the central bank can give the economy an added monetary boost. On Tuesday, the Treasury committed to start buying securities again, albeit in a limited way.

The move came as the Fed acknowledged that a nascent economic recovery had lost some important momentum.

"The pace of recovery in output and employment has slowed in recent months," the Fed's Open Market Committee said in a statement after meeting in Washington. "Bank lending has continued to contract," businesses are reluctant to hire, and consumers are constrained by the weak job market and declines in home values, it said.

The economy's cooling trend has emerged just as the Fed had begun to back off from buying mortgage-related securities as part of an emergency economic-recovery policy. Those bond purchases were designed to keep mortgage rates low, aiding the troubled housing market.

Now, as those securities reach maturity and are paid out, Treasury will replace them by buying Treasury bonds. The goal is for Treasury to maintain $2 trillion in assets. The Fed decided Tuesday that it didn't feel comfortable letting this asset pool start to shrink over time, which would have happened if it had taken no action. Letting the asset pool shrink would have effectively resulted in the Fed taking money out of the economy.


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