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Published: Tuesday, 9/20/2011

Fed begins policy meeting, tiptoes toward easing

REUTERS

WASHINGTON — The U.S. Federal Reserve opened a two-day meeting on Tuesday that is expected to end with a decision to stock up on longer-term Treasury notes in a bid to boost a fading economic recovery.

With economic prospects fading dramatically after a damaging U.S. debt downgrade in August and an escalation of European financial turmoil, the Fed has made clear it is intent on taking further steps to lift growth.

Although officials at the central bank differ on how best to address the economy’s woes, analysts expect Fed Chairman Ben Bernanke to muster a consensus behind a plan to rebalance the Fed’s portfolio to push down longer-term interest rates.

Officials hope that by weighting the central bank’s bond holdings more heavily toward longer-term debt they can spur mortgage refinancings and push investors into stocks or corporate bonds and away from safe-haven Treasuries.

The Fed is expected to announce its decision at about 2:15 p.m. on Wednesday.

Analysts say that faced with a still-growing economy and inflation that is not far below target levels, U.S. central bank officials are preparing a series of measured easing steps but will stop short of an aggressive move like a renewed outright expansion of its balance sheet.

“These are tinkering measures, not the financial bazooka, so to speak,” said Carl Riccadonna, senior U.S. economist for Deutsche Bank in New York. “If we get to a period where the employment numbers turn negative — then I think there will be much more agreement on the Open Market Committee that they will have to do something bolder. We’re certainly not there yet.”

Another modest loosening step some economists believe the Fed could take on Wednesday would be to trim the rate the Fed pays banks for excess reserves parked at the central bank from the current 0.25 percent level. Such a move could make it more attractive for banks to loan money, which could spur the economy.

The U.S. central bank cut overnight interest rates to near zero in December 2008 and then bought $2.3 trillion in longer-term bonds to help the struggling economy.

Its latest bond-buying spree fueled harsh criticism that the Fed was risking inflation and weakening the dollar to the detriment of emerging markets, who saw rapid inflows of hot money.

Some analysts estimate the Fed could purchase between $300 billion and $400 billion of bonds in the five-year to 15-year range over the next six months if they simply move to replace maturing Treasuries. Outright sales of shorter-term bonds could be added to accelerate the reshaping of the Fed’s holdings without adding to the already bloated $2.8 trillion portfolio.

Any move to ease further would come over the objections of some policymakers at the Fed who question whether the central bank should administer more monetary medicine to the struggling economy.

At its most recent meeting in early August, the Fed bolstered its promise to keep rates at rock bottom levels, saying it would do so through at least the middle of 2013. While some officials wanted to go even farther, some disapproved of that move and three dissented against the step.

Still, with unemployment at a lofty 9.1 percent, no job growth in August, and reports showing business and consumer confidence withering, a core group of policymakers, which includes Bernanke, Fed Vice Chair Janet Yellen and New York Federal Reserve Bank President William Dudley, appear solidly behind more stimulus.

As part of those deliberations, the Fed will discuss a wide range of potential steps, such as making public specific targets for unemployment or inflation to make crystal clear to markets that the Fed’s ultra-easy money policies are here to stay unless specific improvements occur.



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