If the world’s investors are right, the Federal Reserve is about to take a bold new step to try to invigorate the U.S. economy.
And many expect the Fed to unleash its most potent weapon: a third round of bond purchases meant to ease long-term interest rates and spur borrowing and spending. It’s called “quantitative easing.”
Others foresee a more measured response when the Fed ends a two-day policy meeting Thursday. They think it will extend its timetable for any rise in record-low short-term rates beyond the current target of late 2014 at the earliest.
On one point few disagree: The Fed feels driven to act now because the U.S. economy is still growing too slowly to reduce high unemployment. The unemployment rate has topped 8 percent every month since the Great Recession officially ended more than three years ago.
In August, job growth slowed sharply. The unemployment rate did fall to 8.1 percent from 8.3 percent. But that was because many Americans stopped looking for work, so they were no longer counted as unemployed.
Chronic high unemployment was a theme Fed Chairman Ben S. Bernanke spotlighted in a speech to an economic conference in Jackson Hole, Wyo., late last month. Mr. Bernanke argued that quantitative easing and other unorthodox Fed actions had helped ease borrowing costs and boosted stock prices.
Higher stock prices increase Americans’ wealth and confidence and typically lead individuals and businesses to spend more.
In his speech, Mr. Bernanke cited research showing that the two previous rounds of quantitative easing had created 2 million jobs and accelerated economic growth. Still, he said persistently weak hiring remains a “grave concern” that inflicts “enormous suffering.”
His remarks sent a clear signal that the Fed will do more.
“He had a sense of urgency in that Jackson Hole speech,” said David M. Jones, chief economist at DMJ Advisors. “I think he is convinced that there is a need to do something.”
Some critics, inside and outside the Fed, remain opposed to further bond buying. They fear that by pumping so much cash into the financial system, the Fed is raising the risk of high inflation in the future. And many don’t think more bond purchases would help anyway because interest rates are already near record lows.
Some economists who doubt the Fed is about to begin more bond buying say the European Central Bank has eased some pressure on the Fed. Last week, the bank announced a plan to buy unlimited amounts of government bonds to help lower borrowing costs for countries struggling with debts.
If the European Central Bank plan succeeds in bolstering Europe, the U.S. economy could benefit, too. Europe’s financial crisis and recession have slowed the U.S. economy, in part by reducing European purchases of U.S. goods.
Some also think the Fed might be reluctant to launch a bond-buying program in the final two months of the presidential campaign. Many Republicans have been critical of the Fed’s unconventional methods to boost the economy. After the financial crisis struck in 2008, the Fed bought more than $2 trillion in Treasury and mortgage-backed securities.
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