Fed expected to do more stimulus

The Federal Reserve is expected to extend a program intended to provide a modest push for economic growth by bringing down long-term interest rates at the conclusion of Wednesday’s meeting, according to several economists.

By renewing “Operation Twist,” as the program is called, the Fed would be able to show investors that the central bank is not pulling back from its years-long campaign to support economic growth. Yet it would also give the Fed time to consider whether more action is necessary, as the U.S. economy faces perils at home and abroad.

“This would allow the Fed time to assess whether the soft patch in the data is temporary . . . or the start of a longer slowdown,” economists at Barclays Capital wrote in a research note Tuesday.

The Fed also could choose to do more or less at Wednesday’s meeting, the outcome of which will be announced at noon, followed by a news conference at 2:15.

More aggressive actions could include a firm commitment to keeping interest rates ultra-low through 2014 or longer — though the Fed only says it expects to do so through 2014 — or even a third round of buying Treasury bonds and mortgage securities.

Such bold steps could spark a rally in markets hoping that the Fed will work to jolt slowing economic growth, or worry investors if the moves suggest that Fed officials are growing increasingly glum about prospects for economic growth.

A decision not to renew “Twist” would likely disappoint investors.

The Fed initially launched the “Twist” program last fall in an effort to increase support for the economy without expanding the central bank’s balance sheet. Under the program, the Fed sells short-term term assets and buys long-term assets.

In doing so, the Fed is able to bring down more stubborn long-term rates — from corporate loans to mortgages — without “printing more money” to do so. Increasing the money supply increases the chance of inflation, which invites political criticism.

Republicans, including GOP presidential nominee Mitt Romney, have said that another round of asset purchases, known as “quantitative easing,” is unwarranted.

If the Fed does act in an aggressive fashion, it will join counterparts from the United Kingdom and China.

China’s central bank cut a key interest rate several weeks ago, spurring a rally, while the Bank of England announced a measure last week to boost lending to British consumers and businesses.

Increased lending and borrowing generates economic growth, usually leading to higher employment.

At the beginning of the year, when the economy looked weak, the Fed seemed prepared to engage in several more aggressive actions to stimulate growth.

But with the economy firming up for much of the winter and spring, the Fed indicated it would pause its stimulus effort.

Now, it may be forced to play catch-up, with a slowdown in emerging markets, the European financial crisis and a lull in U.S. hiring raising the possibility that the recovery is stalling.

The Fed meets again in mid-summer and in September and October, leaving more opportunities to act.

Zachary A. Goldfarb is policy editor at The Washington Post.
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