Fed likely to keep $600B bond-purchase plan intact

[January 26, 2011]  WASHINGTON (AP) -- The Federal Reserve is all but certain Wednesday to maintain the pace of its Treasury bond-buying program because unemployment remains high and sinking home prices are eroding Americans' wealth.

Those and other risks, such as state and local government spending cuts, will likely cause the Fed to stick to its plan to buy $600 billion in Treasury bonds by the end of June. The bond purchases are intended to aid the economy by lowering interest rates, encouraging spending and raising stock prices.

Ending a two-day meeting, the Fed policymakers will likely highlight improvements. Factories are producing more. Consumers are spending more. And businesses are hiring a bit more.

At the same time, Chairman Ben Bernanke and his colleagues will likely note that the risks still justify continued bond purchases.

"The economy is growing at a faster clip, but there are a lot of potholes on the road to recovery," said economist Chris Rupkey at Bank of Tokyo-Mitsubishi. "The Fed will stay the course."

Two of the new voting members have been skeptical of the bond program. They've warned that the purchases could eventually trigger inflation by flooding the economy with billions of additional dollars.

Even so, Charles Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard Fisher, president of the Federal Reserve Bank of Dallas, aren't expected to dissent at Wednesday's meeting.

The Fed's main policymaking group now includes four regional bank presidents who are rotating onto the panel as voting members. Economists predict a show of unity.

"We expect no dissents," said economist Michael Feroli at JPMorgan Chase Bank.

That could change in the spring, when the Fed must decide whether to extend its bond purchases. Any push to renew the program beyond its scheduled June 30 end date would likely face stiffer resistance. Plosser and Fisher might even pressure Bernanke to scale back the program before June.

The Fed is also considered certain to repeat its pledge to hold interest rates at a record low near zero for an "extended period." To bolster the economy, the Fed has kept rates at ultra-low levels since December 2008.

As the economy strengthens, Fisher and Plosser may prod the Fed to start raising rates. Holding rates too low for too long risks igniting inflation. But most economists predict the Fed won't start raising them until next year.

Bernanke pushed the bond-buying program because the economy was growing too slowly to make much dent in unemployment. Unemployment is now 9.4 percent. Even with stronger growth likely this year, the unemployment rate is expected to dip only slightly below 9 percent.

The Fed will probably repeat its concern that high unemployment could constrain consumer spending, which powers roughly 70 percent of U.S. economic activity.

Another restraint likely to be cited is the depressed housing market. Home prices fell in most of the biggest cities near the end of last year. Average prices in eight major metro areas have hit their lowest points since the housing bubble burst, according to a report Tuesday by Standard & Poor's/Case-Shiller.

Those falling prices are weighing on household wealth. For many people, their home is their biggest asset.

Minutes of the Fed's last meeting in December also revealed that policymakers are concerned that state and local governments, confronting budget shortfalls, may be forced to cut spending more deeply and lay off more people.

Bernanke has argued that the Fed can maintain its bond-buying program and hold rates at record lows because inflation isn't a threat, despite rising energy prices. Competitive pressures are restraining many companies from raising the prices they charge consumers.

Inflation "hawks" such as Fisher and Plosser are especially vigilant about price increases. They tend to be more concerned about the threat of high inflation than about the need to stimulate the economy.

The two other new voting members -- Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, and Charles Evans, president of the Federal Reserve Bank of Chicago -- have backed the Fed's bond-buying program.

Fed watchers think Kocherlakota, a first-time voting member, will lean toward hawkishness on inflation. Evans' reputation puts him among the "doves" -- those concerned more about strengthening the economy than about warding off inflation.

The 11 members of the Fed's policymaking group -- the Federal Open Market Committee -- also will update their economic forecasts for this year. The projections will be released in mid-February. Growth is expected to strengthen. Unemployment is likely to stay high, around 9 percent.

[Associated Press; By JEANNINE AVERSA]

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