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Fed to Consider Bond Policy Shift

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When dealing with economic policy, perception is reality. Federal Reserve officials will consider a symbolically important change in the management of their securities portfolio when they meet next week. The change comes on the heels of an economy that seems to be losing momentum, the Wall Street Journal reports.

The issue, according to the paper: Whether to use cash the Fed receives when its mortgage-bond holdings mature to buy new mortgage or Treasury bonds, instead of allowing its portfolio to shrink gradually, as it is expected to do in the months ahead.

The Journal speculates that any change would signal deepening concern about the economic outlook. If the Fed’s forecast deteriorates significantly, it could also be a precursor to bigger efforts to pump money into the economy.

Moving to stop the Fed’s portfolio from shrinking would prevent monetary policy from slightly tightening in the face of a weakening recovery. The central bank’s $2.3 trillion portfolio has nearly tripled in size since 2007.

Buying new bonds with this stream of cash from maturing bonds–projected at about $200 billion by 2011–would show the public and markets that the Fed is seeking ways to support economic growth. But the paper notes it could also be a compromise that rival factions at the Fed support, as officials differ about whether and how to address a subpar recovery.


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