Expectations High for Major Fed Action Thursday

Federal reserveBy MARTIN CRUTSINGER, AP Economics Writer

WASHINGTON (AP) - 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," or QE.

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 Bernanke spotlighted in a speech to an economic conference in Jackson Hole, Wyo., late last month. Bernanke argued that QE 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, Bernanke cited research showing that the two previous rounds of QE 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 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 ECB announced a plan to buy unlimited amounts of government bonds to help lower borrowing costs for countries struggling with debts.

If the ECB's 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.

The Fed "is already a campaign issue, and enlarging its balance sheet will make it even more of one," argues Vincent Reinhart, chief economist at Morgan Stanley and a former top economist at the Fed. Reinhart thinks the Fed will prefer to wait until at least December before announcing more bond buying.

By then, he says, the Fed will have reviewed more employment data. The effect of Europe's debt crisis on the U.S. economy will be better known. And Congress' plans for addressing a U.S. fiscal crisis at year's end will be clearer. Without a budget deal, higher taxes and deep spending cuts will kick in next year.

If the Fed takes the more modest step Thursday of extending its timetable for any rate increase, many analysts think it would push its target date to mid-2015. The goal would be to lower borrowing rates by assuring investors that short-term rates will likely stay near zero even longer than previously thought.

Yet Bernanke's remarks in Jackson Hole about unemployment were so downbeat, and his defense of Fed bond purchases so strong, that many economists suspect a bond-buying program will be unveiled Thursday.

So do investors. In part because of anticipation of a QE3, they've boosted the Dow Jones industrial average nearly 2 percent in September, a month that's typically weak for stocks. On Tuesday, the Dow rose 69 points. And Treasury yields have dropped on expectations that a new Fed bond-purchase program would lower interest rates.

The concern Bernanke expressed in Jackson Hole followed a Fed policy meeting in which many officials felt more Fed action would "likely be warranted fairly soon" unless there was a "substantial and sustainable strengthening in the pace of the economic recovery," according to minutes of the meeting.

Friday's report that U.S. employers cut back sharply on hiring in August dimmed hopes of a strengthening job market.

If the Fed does unveil QE3, some economists think it might differ from the previous bond-buying programs. With its earlier purchases, the Fed announced a dollar amount and a time frame for the bonds it planned to buy.

This time, any new bond-purchase program might be more open-ended. Three regional Fed bank presidents - Eric Rosengren of Boston, James Bullard of St. Louis and Charles Evans of Chicago - have expressed openness to a program in which the Fed would buy bonds until the economy improved significantly and unemployment fell consistently - as long as inflation remained tame.

None of those officials now have a vote on the Fed's policy committee. But they take part in the committee discussions that would allow them to push the idea.

Jones of DMJ Advisors says he thinks open-ended bond purchases will be discussed at this week's policy meeting. Still, he expects the Fed to announce a more conventional bond-buying program of around $500 billion. That would be less than the $600 billion in bonds in QE2 and well below the $1.75 trillion in QE1.

In light of Bernanke's recent comments, Jones doesn't think the Fed wants to delay further support for the economy until the election is over. Neither does Diane Swonk, chief economist at Mesirow Financial.

"This will be an effort on the part of Fed officials to pull out as much firepower as they can," Swonk said. "They are trying for as much shock and awe as they can muster."

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ugojoreds

BLAH BLAH BLAH how does it help the working struggling middle class soon to become the upper lower class???/ We work every day , we pay taxes everyday, we pay into our social security every day, how does this bond plan help us.will I get a raise , because I have not had one in two years, our company has a pay freeze unlees your a ceo getting a bonus for cutting costs, mostly payroll costs.. When is it our turn.???

September 13 2012 at 5:03 PM Report abuse +1 rate up rate down Reply
Bill

How nice of the FED to jump in and help, considering that 2/3 of this country's debt is owed to them with interest payments in the billions of dollars. Do not be fooled that they care one bit about the American people. They care about the economy as long as it keeps pumping wealth into their coffers.

September 13 2012 at 9:51 AM Report abuse rate up rate down Reply
enstncls

The FED? well, some Nobel Prize winning economists blame them for the Great Depression. Certainly, not too long ago, Alan Greenspan favor the repeal of the Glass-Steagall Act. This was the catalyst that caused the 2008 recession years later.

September 12 2012 at 7:28 PM Report abuse rate up rate down Reply
scottee

my only expectations are that Bernanke be fired and The Fed be audited. who will do these things?

September 12 2012 at 5:04 PM Report abuse +1 rate up rate down Reply
Dave

I have just finished reading "The Age of Turbulance" written in 2007, by Alan Greenspan, the previous chairman of the Fed who held the post for 14 years or so. One of the things that I learned was that there is no adequate way know what is the best way to accomplish changes in the economy. Econonomists just do not have accurate models of the economy, and probably can't ever have them; it is easier to model the weather than the economy. One of the biggest problems is that the economy depends on the opiinion of the people. You can have a healthy where people make investments believing the the economy is in good shope so that people buy goods and capitalists keep investing in equipment that will create new jobs for the young people who are entering the job market. But if a doomsayer comes along as says the market is going to crash, and the people believe him and either slow or stop buying goods (other than necesities) and capitalists stop investing in new equipment. So perception of the public is an important, but unpredictable factor in the economy. IF the administration in power says that things are getting better, it can change that perception, but if the opposition says that things are getting worse, that too can change that perception. Right now, am concerned that the election rhetoric is actually making the economy worse. Actions by the Fed Reserve, any action, that does not truely hurt the economy, can change the public perception. \

September 12 2012 at 3:14 PM Report abuse rate up rate down Reply
dch1951

So the Great Recession actually "ended" THREE YEARS AGO? Really? Exactly when? According to whom? The faltering U.S. economy is still plummeting in a downward spiral daily, and it appears that total financial collapse (as in "bankrupt") is possible before the end of the year. Hopefully "President-elect" Obama (yes - we need him to remain right where he is) will be able to actually work amicably with the remaining Republicans to commit to actions that will help prevent the tidal wave of inflation that is looming before us, and get our country back on track as it was when - surprise! - Bill Clinton was in charge. Maybe going back to the Gold Standard would be a good place to start instead of printing tons of Federal Reserve "Monopoly money" as we have been doing. Just a thought...........

September 12 2012 at 11:50 AM Report abuse -3 rate up rate down Reply
nsoccio

It's a very sad situation, If the prime rate was left alone in August of 07, we wouldn't be in the mess today. All the finacial markets Stock, Real Estate ect would have strighten themself out, they always have in the past. Goverment has never solved problems in the past. GOVERMENT IS THE PROBLEM. The best thing Old Helicopter Ben could say at the meeting is 2 words. I RESIGN.

September 12 2012 at 11:22 AM Report abuse +2 rate up rate down Reply
Paul Meeker

The Fed hasn't stopped buying bonds. QE II is still ongoing and isn't helping the economy at all. Short term it just delays needed action; To slash the deficit. Long term its making the next correction (or more likely recession) much, much worse. It's possible the next ression could last longer and hit harder than this country has ever seen. It's simple print more money & devalue the dollar to the point where its no longer going to be accepted as the world's reserve currency.

September 12 2012 at 11:07 AM Report abuse +4 rate up rate down Reply
super

More action by the fed will surely get us another downgrade....Government does not support the private sector therefore if 0bama stays in power expect us to be just another 3rd world country.

September 12 2012 at 11:00 AM Report abuse +6 rate up rate down Reply