Fed Expected to Keep Buying Bonds Despite Firmer US Growth

Wednesday, 24 Oct 2012 07:14 AM

 

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Six weeks after rolling out a bold plan to boost the U.S. economy, the central bank is meeting again amid low expectations for further help.

Private economists believe the Fed will send a simple message after its two-day meeting that it wants to give its previous actions time to work before doing more.

"They have done enough right now. There is no reason to do any more at the moment," said Diane Swonk, chief economist at Mesirow Financial. She said she expects the Fed to deliver further help to the economy but not until the last meeting of the year on Dec. 11-12.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

The Fed's meeting will conclude with a brief announcement at mid-afternoon Wednesday. But there will be no news conference by Federal Chairman Ben Bernanke.

The Fed announcement is expected to affirm officials' plan to keep buying $40 billion per month in mortgage bonds as long as necessary to make home buying more affordable. The Fed is also expected to reaffirm its intention to keep short-term interest rates at record lows through mid-2015 and hold out the prospect of further action if hiring doesn't pick up.

Those policies are intended to support an economy that's shown flashes of strength but isn't growing fast enough to create many jobs or to increase Americans' income. The economy grew at a meager 1.3 percent annual rate in the April-June quarter.

Economists think it grew slightly faster in the July-September quarter, a figure that will not be announced by the government until Friday.

Still, many employers remain wary of hiring, in part because of tax increases and spending cuts set to kick in next year and in part because of a slowing global economy.

The bond purchases the Fed launched last month are designed to lower interest rates and cause stock and home prices to rise, creating a "wealth effect." When consumers feel wealthier, they're typically more willing to spend, thereby boosting the economy.

Fed officials made clear in September that they would likely hold rates low even after the economic recovery has strengthened. That was a signal that it will keep intervening until the economy grows fast enough to reduce unemployment sharply.

The Fed's moves last month were approved on an 11-1 vote, with Jeffrey Lacker, president of the Richmond Federal Reserve Bank, dissenting. He and some of other regional Fed presidents who do not have a policy vote this year have expressed discomfort over the aggressive moves.

The critics note that interest rates have already been at or near all-time lows. They worry that the Fed's injection of steadily more money into the financial system will eventually ignite inflation or create dangerous bubbles in the prices of stocks or other assets.

Since the 2008 financial crisis erupted, the Fed has bought more than $2 trillion in Treasurys and mortgage bonds to try to drive down long-term borrowing rates and accelerate the economy. Its portfolio of investments stands at $2.85 trillion — more than three times its size before the crisis.

Since the Fed unveiled its latest plans last month, the average rate on a 30-year fixed mortgage has touched 3.36 percent — the lowest since mortgage buyer Freddie Mac began keeping records in 1971. Cheap loans have helped lift home sales, prices and construction — key pillars of the housing market's gradual but steady comeback.

One part of the Fed's drive to keep long-term borrowing rates down has been a program it began a year ago to sell short-term securities and use the proceeds to buy $45 billion in longer-term securities each month. This program is called "Operation Twist."

When Operation Twist is combined with the mortgage bond purchases the Fed launched in September, the central bank is buying $85 billion in long-term bonds each month.

Operation Twist is to expire at year's end, when the Fed will run out of short-term securities to sell.

Many analysts think the Fed may announce at its next policy meeting in mid-December that it will replace Twist with some other bond-purchase program. Fed officials could decide to start buying enough new Treasurys to keep their total long-term-bond purchases at around $85 billion each month.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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