SALON

Wednesday, Dec 12, 2012 11:30 AM UTC

Fed expected to revamp bond buying program

By

Topics: From the Wires,

WASHINGTON (AP) — The Federal Reserve is wrapping up 2012 the way it began the year, searching for ways to help a U.S. economy that is still struggling with high unemployment and sub-par growth.

The expectation is that the Fed will announce a revamped bond-buying plan at the conclusion of their second day of discussions on Wednesday. The Fed’s policy statement will be followed by the release of a revised economic outlook and a news conference with Federal Reserve Chairman Ben Bernanke.

If the central bank does revamp its bond purchases, the goal would be to keep downward pressure on long-term interest rates and encouraged individuals and businesses to borrow and spend more.

The Fed’s final meeting of the year is being held against the backdrop of the looming “fiscal cliff,” the sharp tax increases and spending cuts that will hit the economy in January if Congress and President Barack Obama are unable to reach an agreement this month to avert them.

Bernanke has said that the Fed’s efforts will not be able to rescue the economy if the budget negotiations fail and the country does go over the fiscal cliff.

Fears of the cliff have led some U.S. companies to delay expanding, investing and hiring. Manufacturing has slumped. Consumers have cut back on spending. Unemployment remains a still-high 7.7 percent. If higher taxes and government spending cuts were to last for much of 2013, most experts say the economy would sink into another recession.

The expectation is that the Fed will unveil a program Wednesday to buy $45 billion a month in long-term Treasurys. That would replace an expiring program called Operation Twist. With Twist, the Fed sold $45 billion a month in short-term Treasurys and used the proceeds to buy the same amount in longer-term Treasurys.

Twist didn’t expand the Fed’s investment portfolio, it just reshuffled the holdings. But the Fed has run out of short-term securities to sell. So to maintain its pace of long-term Treasury purchases and to keep long-term rates low, it must spend more and increase its portfolio.

The new bond-purchase plan would join a program announced in September. Under that program, the Fed is buying $40 billion a month in mortgage bonds to try to force already record-low home-loan rates lower in a bid to encourage home buying. The total Fed bond purchases from the two programs would remain $85 billion.

“A little better unemployment report for November doesn’t change the Fed’s view that the economy needs additional help,” said Diane Swonk, chief economist at Mesirow Financial.

If the Fed decides not to replace Twist with a new bond-buying program, the monthly amount of its long-term Treasury purchases would decline by half. Long-term borrowing rates might rise as a result.

When the Fed pumps more money into the financial system and adds to its portfolio, it’s called quantitative easing, or QE. Critics argue that QE risks fueling inflation later. The Fed’s portfolio totals nearly $2.9 trillion — more than three times its size before the 2008 financial crisis.

The Fed has launched three rounds of QE since the financial crisis hit. In announcing QE3 in September, the Fed said it would keep buying mortgage bonds until the job market improved substantially. It also extended its plan to keep its benchmark short-term rate near zero through at least mid-2015. And it raised the possibility of taking other steps.

Skeptics note that rates on mortgages and many other loans are already at or near all-time lows. So any further declines in rates engineered by the Fed might offer little economic benefit.

Inside and outside the Fed, a debate has raged over whether the Fed’s actions have helped support the economy over the past four years, whether they will ignite inflation later and whether they should be extended.

The Fed is also expected to resume discussions on how to signal future policy moves to the public more clearly. Since August 2011, the Fed has identified a target date to try to reassure markets that it doesn’t plan to raise short-term rates soon. Some Fed officials, however, oppose using a target date to signal the earliest when it might start raising rates. They’ve been urging that future interest-rate moves be linked to how the economy is faring as measured by unemployment and inflation.

Many private economists expect no change in the Fed’s communications strategy this week.

More By Martin Crutsinger.

Next Article

Related Stories

More Related Stories

Featured Slide Shows

The week in 10 pics

close X
  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11
  • Lisa Montgomery embraces her nephew Thursday after a tornado tore apart her home in Cleburne, Texas. The twister killed six people and destroyed entire swaths of the North Texas town.
    Credit: AP/LM Otero

  • Jack McMahon, the defense attorney for abortion doctor Kermit Gosnell, speaks outside the Criminal Justice Center in Philadelphia Tuesday. His client was convicted of killing three babies in his clinic, and will serve multiple life sentences.
    Credit: AP/Matt Rourke

  • A photo taken Monday captures Vice President Joe Biden's response to a Milwaukee second-grader's innovative proposal to end America's epidemic of gun violence. This guy!
    Credit: AP/Jenny Aicher

  • Sen. Rand Paul, R-Ky., flanked by a grouper-eyed Michele Bachmann, addresses the IRS' admission that it targeted Tea Party groups in advance of the 2012 election. In an op-ed for CNN Thursday, the Kentucky senator slammed the president for his faux outrage.
    Credit: AP/Molly Riley

  • Ousted IRS chief Steven Miller is sworn in on Capitol Hill Friday. Miller testified before the House Ways and Means Committee on the extra scrutiny the agency gave conservative groups applying for tax-exempt status.
    Credit: AP/J. Scott Applewhite

  • Attorney General Eric Holder pauses as he testifies on Capitol Hill before the House Judiciary Committee Wednesday. Holder is under fire, among other things, for the Justice Department's gathering of phone records at the Associated Press.
    Credit: AP/Carolyn Kaster

  • O.J. Simpson sits during an evidentiary hearing at Clark County District Court in Las Vegas, Nev., Thursday. Simpson, who is currently serving a nine-to-33-year sentence in state prison for armed robbery and kidnapping, is using a writ of habeas corpus to seek a new trial.
    Credit: AP/Las Vegas Review-Journal/Jeff Scheid

  • Major Tom to ground control: On Sunday astronaut Chris Hadfield recorded the first music video from space, a cover of David Bowie's "Space Oddity."
    Credit: AP/NASA/Chris Hadfield

  • When it rains it pours. President Barack Obama speaks during a news conference Thursday with Turkish Prime Minister Recep Tayyip Erdogan, inexplicably inspiring an #umbrellagate Twitter meme.
    Credit: AP/Jacquelyn Martin

  • A smoke plume rises high above a road block at the intersection of County A and Ross Road east of Solon Springs, Wis., Tuesday. No injuries were reported, but the the wildfire caused evacuations across northwestern Wisconsin.
    Credit: AP/The Duluth News-Tribune/Clint Austin

  • Recent Slide Shows

  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11

Related Videos

Comments

 0 Comments

Comment Preview

Your name will appear as username

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>

follow salon

Most Read

Popular on Reddit

links from salon.com

vote
Oklahoma senator: Tornado aid “totally different” from Sandy aid
3117 points3118 points | 2647 comments
vote
Anyone Regret Slashing National Weather Service Budget Now?: With GOP-backed cuts to forecasting agency, experts warn future storms will go undetected and more lives lost
1108 points1109 points | 593 comments
vote
Oklahoma senator wants to offset tornado aid with other cuts
154 points155 points | 61 comments
vote
New campaign compares gun control to anti-LGBT discrimination
32 points33 points | 11 comments
vote
Horrifying new trend: Posting rapes to Facebook " In Chicago this weekend, prosecutors announced three teenaged boys will tried as adults for aggravated criminal sexual assault after allegedly raping a 12-year-old girl — and posting a video of the attack on Facebook."
29 points30 points | 15 comments

From Around the Web

Presented by Scribol
listener_new_rect The Listener: So long, Sookie Stackhouse

Recommendations