Wednesday, September 12, 2012
Fed expected to unveil plans for another stimulus program
Federal Reserve Chairman Ben S. Bernanke is expected to announce plans this week for a third stimulus involving a controversial bond-buying program.
Federal Reserve Chairman Ben S. Bernanke is poised to roll out another stimulus program — and risk the wrath of conservative critics.
Bernanke and his central bank colleagues gather Wednesday for a pivotal two-day session fresh off last week’s disappointing jobs report, the latest in a string of signs that the economic recovery is faltering.
And with Europe, China and other nations taking steps to bolster their struggling economies in the face of a global slowdown, Washington and Wall Street expect the Fed to unveil plans for a third round of its controversial bond-buying program when the meeting ends Thursday.
Economists said the move could help boost the economy if the Fed focuses its efforts on the slowly improving housing market. By buying mortgage-backed securities, it could edge down already historically low borrowing rates.
Lower rates also could make banks more likely to lend because it would be easier to sell the loans to the Fed and avoid risks of losses. That, in turn, could help stimulate economic activity and help create jobs.
“There’s a bigger bang for the dollar when you’re hitting a market that’s already showing signs of healing,” said Diane Swonk, chief economist with Mesirow Financial.
Given expectations of some action, the Fed could trigger a market sell-off if it opts to do nothing.
“It would be a pretty big disappointment if the Fed did not act at this stage of the game,” Swonk said. “The employment report was the game changer.”
There are downsides to another round of so-called quantitative easing.
Lower interest rates hit elderly Americans hard by reducing the income they could draw from their savings, particularly certificates of deposit.
“It’s badly pinching seniors who rely on CDs,” said James Chessen, executive vice president of the American Bankers Assn., an industry trade group.
And those low rates, which the Fed has promised to extend at least through 2014, could be keeping businesses from borrowing now because they know they’ll have access to cheap money for a long time.
The previous two rounds of bond buying have caused the Fed’s balance sheet to more than triple to $2.8 trillion over the last four years, angering Republicans and fueling a conservative movement to dismantle the central bank.
Launching a stimulus program in the weeks before a presidential election also could lead Congress to take steps to rein in the Fed’s authority, said Gregory D. Hess, an economics professor at Claremont McKenna College.
A new round of bond buying could be “another shovel full of dirt as the Fed digs its own grave as a politically independent institution,” he said.
Full article: http://www.latimes.c … 0912,0,5665948.story
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