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Fed Offers Fresh Aid To Shaky U.S. Recovery

The aim of the Federal Reserve is to drive down interest rates on mortgages and corporate borrowing and help the economy grow faster.
The Federal Reserve is taking new steps to stimulate the U.S. economy to counter an unexpected weakening in the pace of recovery from recession.

The Fed's Open Market Committee said in a statement after a meeting in Washington on August 10 that growth has slowed in recent months, and that the pace of recovery is "likely to be more modest in the near term than had been anticipated."

Behind that cautious wording is worry that the country might be failing to pull out of its downturn and might be heading into a "double-dip" recession.

To offset this possibility the Fed announced that it will use cash from mortgage bonds it holds to buy more government debt. The Fed holds over a trillion dollars in mortgage securities, bought up during the 2008 financial crisis in a bid to stabilize the housing market.

The aim of the latest move is to drive down interest rates on mortgages and corporate borrowing and help the economy grow faster.

In addition, the Fed left benchmark overnight interest rates steady in a zero to 0.25 percent range and renewed its pledge to keep them low for an extended period.

Policy Shift

In June, the Fed gave a rosier prediction of the course of recovery, and officials began to plan an exit strategy from stimulus measures, assuming that the economy was becoming strong enough to look after itself. It had also planned to gradually raise interest rates.

The latest intervention appears to reverse this assumption.

Analysts say, however, that they don't expect the move to make a great deal of difference, and that -- with interest rates already at or near zero -- there's a limited amount the Fed can still do.

"I think the Fed is quickly running out of options. There are still more things that they can do from a quantitative-easing perspective, but we've been in a very easy monetary position for quite a while and the recovery is never the less having trouble getting going," says the ratings agency Standard & Poor's equity strategist, Alec Young.

"So, in the short term I think these more aggressive actions to get the economy back on track are welcome by investors, but over time we're going to start to see some traction here or I think that the market's belief that the Fed can really do much is going to fade over time."

The Fed's renewed step into stimulus measures is in strong contrast to the moves of governments across the Atlantic. In Europe, a string of governments, from the battered economies of Greece and Spain, to the healthier economies like Germany, have all imposed severe economic austerity programs.

Fears that the radical measures being taken will strangle growth have been outweighed by the perceived need to cut huge government debts, which were undermining money markets' confidence in the common currency, the euro.

compiled from agency reports