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Fed signals it will take further steps if needed

September 21, 2010|Reuters

The Federal Reserve said on Tuesday it stood ready to provide additional support to bolster a modest economic recovery, suggesting it may be preparing to do more to keep unemployment from rising and prices from falling.

The U.S. central bank made no shift in monetary policy at the end of a one-day meeting, although it expressed somewhat greater concern about the sluggish pace of economic growth and uncomfortably low inflation than it had when it last met in August.

"The committee will continue to monitor the economic outlook and financial developments and 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," the Fed said in a statement.

Kansas City Federal Reserve Bank President Thomas Hoenig dissented for a sixth consecutive time.

After cutting the overnight federal funds rate to near zero in December 2008, the Fed launched an asset-buying program in a further effort to lower borrowing costs and help the economy.

In the end it bought $1.7 trillion in longer-term U.S. government debt and mortgage-related bonds.

The Fed's easy money policies and the prospect of further easing have driven up the value of currencies in other countries, including Japan and Brazil, as investors moved out of the dollar in search of higher returns.

Japan intervened last week to weaken the yen, which had surged to a 15-year high against the dollar, and emerging markets are seeking ways to control huge capital inflows.

The painful U.S. recession ended in June 2009, but the recovery has lost momentum this year with growth tapering to an anemic 1.6 percent annualized rate in the second quarter.

Other economic data over the summer also proved surprisingly weak, prompting analysts to cut their growth forecasts for the second half of the year. A Reuters poll on Sept. 8 found analysts looking for growth in the third quarter to come in at just a 1.8 percent rate.

While the tone of the data has improved in recent weeks, the economy's sluggish pace and a deeply troubled job market have kept alive fears of another downturn. The unemployment rate stands at a lofty 9.6 percent and private sector hiring has been tepid.

Acknowledging the flagging recovery, the Fed opened the door to more easing at its last gathering on Aug. 10 when it announced it would resume purchases of longer-term Treasury securities to prevent its portfolio from shrinking as the mortgage-linked debt it holds matures.

Fed Chairman Ben Bernanke said late last month that the central bank was ready to provide more stimulus if needed, but that policymakers would only act if the outlook deteriorated significantly.

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