The Federal Reserve pledged Tuesday to provide more aid to the economy should the sluggish recovery slow even more in coming weeks.
Signaling the likelihood of more lenient money policies in coming weeks, the nation’s central bank took no immediate steps on interest rates but noted that consumer spending — the biggest engine of economic growth — “remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit.”
In a statement after a day-long meeting of its rate-setting committee, the Fed listed the major factors holding back growth: “Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract.”
Even business spending to replace aging computers and software — which had been a strong point for the economy only a few months ago — recently has softened, it noted.
While the Fed expects the recovery will continue at a subdued pace, it noted a risk that growth will fall further, and possibly even plunge the economy into a destructive bout of deflation in which falling prices cause businesses and consumers to put off spending plans even longer.
In an unusual move that touched off controversy, the Fed noted that inflation recently has fallen to levels that suggest deflation could become a problem if the economy does not pick up speed.
It said one of its goals is to boost inflation back into an acceptable range — generally thought to be between 1 percent and 2 percent. The statement is unusual because the Fed is known primarily as an inflation fighter rather than an institution tolerant of rising inflation rates.
The Fed in its statement said it “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.”
Some economists say the comment marked a major — and possibly dangerous — change in strategy for the Fed, suggesting it has abandoned its traditional inflation-fighting mission and is now focused on deterring deflation.
Peter Schiff, president of Euro Pacific Capital, said Federal Reserve Chairman Ben S. Bernanke and other committee members effectively redefined the Fed’s mandate by raising what Mr. Schiff considers a bogus threat of deflation.
“It´s hard to fathom that so momentous a shift in doctrine, which should send a shiver down the spine of all U.S. dollar holders, has been overlooked in the immediate reaction to the decision” not to take any immediate steps on interest rates, he said.
The shift also provoked some dissent within the Fed’s own ranks, with one member of the Fed’s rate-setting committee protesting that the Fed’s loose-money policies could cause “imbalances” in the economy that would be more of a problem than deflation in the future.
The stock market reacted mildly to the Fed’s statement. The Dow Jones Industrial Average initially spiked by about 40 points afterward, but then settled back to end up a little over 7 points at 10,761.
While stock investors may be blase about the new tack at the central bank, global investors in other markets were not, Mr. Schiff said.