Fed is expected to launch new bond buying program
12/12/2012WASHINGTON — The Federal Reserve is expected to announce a revamped bond-buying plan today to maintain its support for the U.S. economy.
The Fed's goal would be to keep downward pressure on long-term interest rates and encourage individuals and companies to borrow and spend. If it succeeds, the Fed might at least soften the blow from tax increases and spending cuts that will kick in in January if Congress can't reach a budget deal.
But chairman Ben Bernanke warned last month that if the economy fell off a “broad fiscal cliff,” the Fed probably couldn't offset the shock.
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 lasted for much of 2013, most experts say the economy would sink into another recession.
On Tuesday, the Fed began a two-day meeting, which will end this afternoon with a statement announcing its policy decisions. Afterward, the Fed will update its forecasts for the economy, and Chairman Ben Bernanke will hold a news conference.
The expectation is that the Fed will unveil a program to buy $45 billion a month in long-term Treasurys. This 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 help 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 to encourage home buying. The total Fed bond purchases from the two programs would remain $85 billion.