WASHINGTON — When the Federal Reserve holds a policy meeting today and Wednesday, it is widely expected to adopt some new step to boost the economy. The question is what it will be.
Whatever the Fed does will likely be intended to drive down long-term interest rates to encourage borrowing and spending and lift stock prices. The idea is that all of that would combine to help raise economic growth and hiring.
The move that is considered most likely is for the Fed to adjust the makeup of its $1.7 trillion portfolio of Treasury securities. The Fed would sell some shorter-term Treasurys. And it would use the proceeds to buy longer-term Treasurys. That shift could drive down long-term rates.
Other options the Fed might consider:
• Adjusting its portfolio. This is the move that most analysts expect to be announced when the Fed’s meeting ends Wednesday. It’s been dubbed “Operation Twist,” after a similar move taken in the early 1960s when Chubby Checker’s version of “The Twist” was the rage. The Fed tried to “twist” rates to lower long-term rates relative to short-term rates.
• More bond purchases. The Fed could announce a third round, a step known as quantitative easing. This would probably be the most dramatic move it could make. Economists think it’s unlikely, in part because of criticism the second round of bond buying evoked from some. Critics warned that the purchases raised the threat of inflation, weakened the dollar’s value and contributed to a spike in prices of oil and other commodities.
• Wording change. The Fed could provide further guidance on future action. Such a move is being urged by Charles Evans, president of the Federal Reserve Bank of Chicago.
Evans has suggested the Fed commit to keeping rates low until unemployment, now 9.1 percent, drops to 7.5 percent or lower — as long as “core” inflation doesn’t exceed 3 percent. That commitment could reassure investors that rates would remain low well into the future.
• Lower interest on reserves. Fed Chairman Ben Bernanke raised this option in testimony to Congress in July, which would reduce the 0.25 percent interest the Fed pays banks on their excess reserves. Cutting that rate could reduce the incentive for banks to keep their money at the Fed. So they might lend more.
Yet economists say the availability of credit isn’t the main reason for low levels of lending. Rather, weak consumer and business confidence has cut demand for loans.
