WASHINGTON — With the country stuck in a recession, the Federal Reserve is widely expected to keep its key interest rate at an all-time low this week and examine other, unconventional ways to lift the economy.
Fed Chairman Ben Bernanke and his colleagues are battling a three-headed economic monster: crises in the housing, credit and financial markets that, taken together, haven’t been seen since the 1930s.
While Bernanke has pledged to do all he can to provide relief, President Barack Obama and Congress are racing ahead to enact an $825 billion package of increased government spending and tax cuts.
Against that backdrop, the Fed is all but certain to hold rates near zero and may offer greater insights into what other steps might be taken to ease the problems. The Federal Open Market Committee — the central bank’s main policymaking group — opens a two-day meeting Tuesday to assess economic and financial conditions, review the effectiveness of programs already in place to deal with the trio of crises and examine new relief options going forward.
At its previous meeting in December, the Fed took the unprecedented action of slashing its key rate from 1 percent to a targeted range of between zero and 0.25 percent. Economists predict the Fed will leave rates at that record-low range Wed nesday and probably through the rest of this year in a bid to help brace the economy.
“Fed policymakers don’t want to let up until they are absolutely sure an economic recovery has taken hold,” said Bill Cheney, chief economist at John Hancock Financial Services. “Overall, their tone is going to be pretty pessimistic. The economy is still spiraling down, and all the negative forces are feeding on each other.”
Economists are divided on whether the Fed might announce some new actions Wed nesday to deal with the crises.
One option being considered is expanding a program aimed at bolstering the availability of consumer loans.
Under the program, which is expected to start in February, up to $200 billion will be made available to spur auto, student and credit-card loans as well as loans to small businesses. To do that, the Fed will buy securities backed by those different types of consumer debt. The Fed also hopes that action will lower rates on those loans.
Another option is for the Fed to buy longer-term Treasury securities.
Even as the Fed wants to use all tools available to battle the crisis, it is mindful that there are dangers: the potential to put ever more taxpayer dollars at risk; sow the seeds of inflation; and encourage “moral hazard,” where companies feel more comfortable making high-stakes gambles because the government will rescue them.
On a separate track, the Treasury Department is overseeing a much-criticized $700 billion financial-bailout program that is likely to be retooled by the new administration.
