The Fed “is getting very close to its limits,” said Jonathan Wright, an economics professor at Johns Hopkins University.
On Wednesday, the Fed may extend the time it plans to keep interest rates low for an added year beyond late 2014, its current plan. According to economic study conducted by Fed economists, adopting the longer timeline would likely have just a small effect on unemployment. The jobless rate at the end of this year would be 8.29 percent, compared to 8.35 percent under the current plan, the study showed. The effect next year could be larger.
The Fed is also contemplating a new round of asset purchases. By acquiring Treasury bonds and mortgage bonds, the Fed would inject more money into the economy, making interest rates lower. The Fed has already undertaken two rounds of asset purchases, known as quantitative easing.
The central bank followed those measures with other steps intended to lower the interest rates that consumers and businesses pay. In “Operation Twist,” the Fed sold short-term assets and bought long-term ones. The program was renewed in June through the end of the year.
A wide range of economic research has examined the impact of these programs. The effects can be hard to discern, because stock prices and bond market rates are affected by a variety of factors.
In particular, U.S. interest rates have come down largely because global investors, frightened by economic upheaval in Europe, have been piling into U.S. Treasury bonds and other securities for safety.
Still, the research has showed “some diminishing returns” to the Fed’s efforts, said Michael Feroli, chief U.S. economist at JPMorgan Chase.
Economists say the first round of asset purchases, in early 2009 during the worst of the financial crisis, probably had the biggest effect, providing increased confidence and reducing borrowing costs by perhaps half a percentage point.
Later efforts may only have had a quarter or a fourth as much impact, according to research.