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The Daily Wildcat

The Daily Wildcat

 

    Fed plans $600 billion bond purchase to goose economy

    WASHINGTON — In the wake of congressional elections that make new government stimulus spending even more unlikely, Federal Reserve policymakers on Wednesday announced a new $600 billion bond-buying program to bolster the weak American economy and to help bring down the stubbornly high unemployment rate.

    The much-anticipated plan, which involves purchases of U.S. Treasury bonds, was in line with what many analysts had expected. The Fed left open the possibility of upping the ante, depending on the economic conditions.

    In taking this extraordinary step, the Fed painted a picture of an economy that continued to grow too slowly, constrained by high unemployment and a depressed housing market.

    Besides maximizing employment, the central bank’s other objective is to maintain price stability. But it said inflation has been running too low, raising concerns that the nation may be in danger of a deflation trap, with broadly falling prices and wages.

    Although Fed policymakers expect the employment and inflation picture to improve gradually, “”progress toward its objectives has been disappointingly slow,”” the Fed said in a statement issued at the conclusion of its two-day meeting.

    In buying longer-term Treasury bonds at a pace of about $75 billion a month through June 2011, policymakers are aiming to drive down long-term interest rates in the hope of spurring more home refinancing and other borrowing and spending by consumers and businesses.

    But economists worry its effects may be limited and that the move, essentially printing money and cheapening the dollar, could sow the seeds of higher-than-wanted inflation and asset bubbles.

    Many economists believe that the Fed’s previous asset-purchase plan during the recession, which eventually totaled $1.7 trillion, helped stabilize financial markets and avert an economic collapse. But no one knows what this new round of bond purchases will do.

    In part that’s because the economy is on more solid footing, and stock prices and interest rates already have moved to some degree from expectations of Wednesday’s statement. Investors showed little enthusiasm in the immediate aftermath of the Fed’s announcement, with the Dow initially down but then recovering.

    Although the Fed plan could encourage greater business and consumer spending by making credit cheaper and more readily available, some economists think it will have only limited effect. That’s because many consumers are still struggling to deal with their existing debts and businesses may be reluctant to borrow money for expansion when demand for their products remains weak.

    Fed Chairman Ben S. Bernanke has acknowledged the limits of the central bank’s ability to lift the economy single-handedly, but he appears to have concluded that the danger of doing nothing requires him to make a renewed effort.

    And that may be especially so after Tuesday’s election in which Republicans gained control of the House.

    “”Fiscal policy will now be largely paralyzed for the next two years,”” said analysts at Capital Economics in a research note, so “”the onus will be on monetary policy to support the economic recovery.””

    The Fed’s traditional method of influencing the economy is by pushing up or down the benchmark short-term interest rate that it controls.

    But the central bank has kept that overnight bank-lending rate near zero since late 2008. And on Wednesday, it reaffirmed that that’s where this rate would remain for the foreseeable future.

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