WASHINGTON (Reuters) – The Federal Reserve yesterday took fresh steps to lower borrowing costs amid a softening economic recovery, announcing it would use proceeds from its maturing mortgage bonds to buy more government debt.

The decision to reinvest proceeds from the more than $1.3 trillion in mortgage-related debt the Fed holds, an effort to keep market-set borrowing costs down, represents a significant policy shift. Just a few months ago, the central bank had been avidly debating an exit strategy from the extraordinary stimulus delivered during the financial crisis.

"To help support the economic recovery in a context of price stability, the committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities," the Fed said in a statement.

The move was somewhat surprising. Although many analysts and investors had expected the Fed to announce it was reinvesting the mortgage proceeds, most had thought it would buy more mortgage debt instead of government bonds.

Some analysts believe the Fed will end up having to go further in coming months and restart its shuttered program of outright asset purchases.

"The Fed is a step closer to reviving its programme, but it will likely take somewhat slower growth to push it off the fence," said Sal Guatieri, senior economist at BMO Capital Markets. The Fed also 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.

US stocks trimmed losses on the announcement, while prices for US government debt rose, with the 30-year bond gaining more than a point. The dollar fell against both the euro and the yen.

In their statement at the close of a one-day meeting, Fed officials offered a more gloomy outlook for the economy, saying the recovery in output and employment "has slowed in recent months". When it last met in late June, it said the recovery was "proceeding".

Kansas City Federal Reserve Bank president Thomas Hoenig dissented for a fifth straight meeting over the Fed's vow to keep rates low for a long time.