Posted September 22, 2010 | comments Leave a comment

The Fed sits tight

Anyone looking for the Federal Reserve to give the tepid recovery a quick boost was disappointed Tuesday.

Its Open Market Committee surveyed the economy's state, a day after the official arbiter of recessions declared recovery began 15 months ago, and decided to sit tight.

Significantly for the Fed, which values caution and cloaks its deliberations in opaque language, the committee signaled that it was prepared to support the economic recovery -- but later rather than sooner.

With its benchmark short-term interest rate at nearly zero and inflation dormant -- so much so that some economists worry about an outbreak of deflation -- the Fed has to rely on other tools to work its will. Foremost is buying large amounts of Treasury bonds, in effect creating money and pushing down long-term interest rates to spur borrowing.

That strategy, known as "quantitative easing," was broached last month by Fed Chairman Ben Bernanke in an effort to ease concerns about the economy. The Fed completed one such round in March.

Bernanke, a keen student of the Great Depression, has shown unusual inventiveness in responding to the financial meltdown of 2008 and the Great Recession. He vastly increased the Fed's portfolio to prop up the economy and has been balancing the competing options of nurturing the recovery and unwinding the Fed's outsized emergency holdings.

But the Fed board evidently concluded that immediate action was not necessary, which is either a tacit acknowledgment that the economy is improving, albeit slowly, or a preference for inaction before congressional elections on Nov. 2.

While many analysts and worried Americans would have preferred that the Fed embark immediately on more "quantitative easing" to boost the fragile recovery, it chose only to signal its willingness to take further action -- but meanwhile to sit on its hands.

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