A host of economic indicators have slowed in recent weeks and a
sharp spike in gasoline prices earlier this year has made consumers
and businesses more cautious about spending. The central bank,
wrapping up a two-day meeting on Wednesday, is expected to
acknowledge the recent soft patch but insist that growth should
rebound in the second half of the year.
In a speech earlier this month, Bernanke maintained that the
slowdown is temporary and said the economy should pick up later this
year as the impact of high gas prices and supply disruptions caused
by the March earthquake and tsunami in Japan abate. However, the Fed
is now confronting renewed jitters that a debt crisis in Greece
could spread to other heavily indebted European nations and send
shockwaves through U.S. and global financial markets.
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On Wednesday the Fed is expected stay the course, keeping interest
rates unchanged and declaring that it will end on schedule a $600
billion Treasury bond purchase program at the end of this month. The
central bank also is expected to repeat a pledge to maintain its
current level of securities holdings, which stand at a record $2.6
trillion. The belief is that this sizable stockpile will keep
interest rates from rising even though the Fed is not adding to its
holdings.
Many private economists believe it will be another full year before
the economy has recovered enough for the Fed to actually start
raising interest rates.
The Fed will release an updated economic forecast which analysts
believe will trim growth expectations slightly while predicting that
inflation outside of volatile food and energy prices will remain
under control. Bernanke will explain the new forecast at a news
conference following the Fed's closed-door discussions. The media
event -- part of the chairman's efforts to make the central bank less
mysterious -- follows his first regular news conference in April. Bernanke is expected to hold four sessions with reporters each year.
The Fed is winding down its bond buying program, dubbed QE2 not for
the Queen Elizabeth ocean liner but as short-hand for "quantitative
easing." That's the wonky term that economists use to characterize
the Fed's effort to drive down long-term interest rates by buying up
Treasury bonds. QE2 marked the second round of such easing the Fed
had taken; the first was in March 2009 at the depths of the
recession.
Supporters say the bond purchases have worked, in part by keeping
rates low and encouraging spending. Low long-term rates are vital
for consumers buying homes and cars and for companies making
investments.
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![Investments](../images/ads/current/eagle_one_inv-lda091007.png) They also argue that those lower rates fueled a stock rally. When
Bernanke outlined plans for QE2 in late August 2010, the Standard &
Poor's 500 index was down 6 percent for the year. Eight months
later, the S&P 500 was up 28 percent. The lower rates made stocks
more attractive to investors than bonds, whose yields were falling. Mark Zandi, chief economist at Moody's Analytics, said the bond
purchases gave a sagging economy a lift by slightly reducing
borrowing costs for businesses and consumers and by raising stock
prices to make people feel wealthier. Still, it didn't much energize
home buying or other major purchases.
"It wasn't a slam-dunk success, but it was worthwhile," Zandi said.
Critics, including some Fed officials, saw things differently. They
warned that by pumping so much money into the economy, the Fed
increased the risks of high inflation later. They have complained
that the Fed's outpouring of dollars hurt the dollar and contributed
to a spike in oil and food prices. They also feared the bond
purchases fed speculative buying that could inflate bubbles in
prices of stocks or other assets.
Bernanke hit back at those critics in a speech last month. He argued
that higher oil prices were due to Middle East turmoil and demand in
fast-growing countries like China and blamed food-price inflation
mainly on crop shortages caused by bad weather. And he said the
falling dollar was largely linked to slower U.S. growth and the U.S.
trade deficit.
[Associated
Press; By MARTIN CRUTSINGER]
Copyright 2011 The Associated Press. All rights reserved. This
material may not be published, broadcast, rewritten or
redistributed.
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