Fed meets as risks widen; policymakers aim to guard against inflation while fostering growth

By The Associated Press
The Associated Press
Tuesday, March 15, 2011; 12:15 AM

WASHINGTON - The Federal Reserve meets Tuesday at a time of widening economic risks: higher oil and food prices; unemployment near 9 percent; crises in the Middle East and Japan.

Threats at home and abroad have the potential to slow the U.S. economy, or heat up inflation. Or both.

Chairman Ben Bernanke and his Federal Reserve colleagues will debate those risks at Tuesday's session. At the top of their agenda is whether to make any changes to the Fed's $600 billion Treasury bond-purchase program, which is set to expire at the end of June. The bond purchases are intended to help the economy by keeping long-term interest rates down, encouraging spending and driving up stock prices.

Economists think the Fed will agree Tuesday to maintain the pace and size of the bond purchases. But the risks the economy is facing will likely complicate Bernanke's efforts to forge consensus.

"Bernanke is walking a tightrope," said Victor Li, associate professor of economics at Villanova School of Business

The Fed chief and a majority of his colleagues argue that the economy still needs support from the bond purchases, especially with unemployment still high and home prices in many areas depressed.

But a vocal minority on the Fed has raised concerns that the bond purchases, combined with higher prices for food, fuel and other commodities, will spread inflation through the economy. They also say they worry that the purchases could feed speculative buying that could inflate new bubbles in the prices of stocks or other assets.

Charles Plosser, president of the Federal Reserve Bank of Philadelphia, has said he may push for an early end to the bond-buying program. And Richard Fisher, president of the Federal Reserve Bank of Dallas, has said he might push to scale back the bond purchases.

A contentious debate is expected Tuesday. If, as expected, Bernanke prevails and the Fed decides to keep the bond-buying program intact, Plosser and Fisher might dissent.

There's a slight chance that Bernanke could craft a compromise. That could involve slowing down the bond purchases by extending the program's end date to September. The total size of the program, however, would stay the same.

"This modest alteration in the large-scale asset program could be seen as a positive by both the doves and the hawks," said economist Steven Ricchiuto at Mizuho Securities. However, Ricchiuto and many other economists think it's more likely that the Fed won't make any changes to the bond-purchase program.

With reputations as inflation "hawks," Plosser and Fisher are more concerned about rising inflation, than about stimulating the economy and lowering unemployment. Bernanke and other "doves" are more concerned about stimulating the economy and reducing unemployment.

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