WASHINGTON — The Federal Reserve begins a two-day meeting today that is expected to conclude with the announcement of an unorthodox plan to spark life into the U.S. economy.
The Fed has signaled since August that it will begin purchasing government bonds in an attempt to drive down the bonds’ yield, or their return to investors. It hopes that by flattening the return that investors can get from the safest investments, they’ll take more risks and lift the economy out of its doldrums.
The dollar is expected to weaken as a result of the Fed’s purchase of two- year and 10-year Treasury bonds. That’ll boost the U.S. economy by making U.S. exports cheaper abroad. The action also is expected to compel similar steps by the British, European Union and Japanese central banks later this week. The risk is that all the new pump-priming may end up igniting inflation down the road.
In normal times, the Fed lowers short-term interest rates as a tool to heat up the economy or raises them to cool it down. Times are anything but normal, and the Fed’s benchmark lending rate, which influences loan rates across the U.S. economy, has been near zero since 2008.
That has helped to spur a modest recovery; the massive federal stimulus spending helped too. But unemployment remains near 10 percent, growth remains weak, and there’s little appetite in Congress for additional spending to spur the economy.
That leaves the Fed as the only game in town, reaching for an unconventional tool.
“If you have an instrument that could work, you are supposed to use it at times of distress,” said Vincent Rein hart, a former top economist on the Fed’s rate-setting Federal Open Market Committee. “They might not go into it with a lot of confidence, but they recognize that if they were to sit on their hands, the Fed’s reputation could be damaged.”
There’s considerable skepticism about whether the unorthodox step, called quantitative easing, will work. Many analysts fear that it sets the stage for revived inflation, a rise in prices across the economy. Some experts worry that the Fed may not be able to rein in inflation once it reignites or may face pressure from politicians to tolerate higher inflation rather than dial it back as the economy recovers.
